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CA Final · Financial Reporting · Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Kaveri Engineering Ltd. has a present obligation arising from a past event under a warranty dispute. Its lawyers state that an outflow of resources is probable, but the amount of the obligation cannot be estimated with sufficient reliability. Under Ind AS 37, how is this obligation classified?

It is a contingent liability. Although it is a present obligation with a probable outflow, a sufficiently reliable estimate of the amount cannot be made, so it fails the recognition criteria in Ind AS 37. It is therefore not recognised as a provision.

  1. AA provision, because the outflow is probable
  2. BA contingent asset, because the amount is uncertain
  3. CA contingent liability, because it is a present obligation that does not meet the recognition criteriaCorrect
  4. DAn item recognised as a liability at zero value

Explanation

Para 13(b)(ii) says a present obligation is a contingent liability when it fails the recognition criteria, including where a sufficiently reliable estimate cannot be made. Here the outflow is probable but no reliable estimate exists, so recognition fails. The provision option ignores the reliable-estimate condition.

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