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CMA Intermediate · Corporate Accounting and Auditing · Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Kaveri Auto Ltd has a present obligation from a past event and an outflow is probable, but a sufficiently reliable estimate of the amount cannot be made. Which treatment follows from paragraph 13?

No provision is recognised, and the item is a contingent liability. Although a present obligation exists and an outflow is probable, a provision needs a sufficiently reliable estimate of the amount. Where that cannot be made, the obligation does not meet the recognition criteria and is treated as contingent.

  1. ARecognise a provision at the highest possible amount
  2. BDo not recognise a provision; the item is a contingent liabilityCorrect
  3. CRecognise a provision of nil and ignore the item entirely
  4. DRecognise a contingent asset for the same amount

Explanation

Paragraph 13(b)(ii) lists present obligations as contingent liabilities when a sufficiently reliable estimate cannot be made, even if an outflow is probable. Provisions are recognised assuming a reliable estimate can be made. Hence no provision is booked, and the item is a contingent liability rather than an asset.

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