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

Kaveri Engineering Ltd has a present obligation from a past event, and an outflow of economic benefits is probable. However, the company cannot make a sufficiently reliable estimate of the amount. Under Ind AS 37, what is the correct treatment?

It is treated as a contingent liability. Ind AS 37 says a present obligation that does not meet the recognition criteria, because a sufficiently reliable estimate of the amount cannot be made, is a contingent liability. A provision requires a reliable estimate, so no liability is recognised.

  1. ARecognise a provision at the lowest conceivable amount
  2. BTreat it as a contingent liability, since a present obligation failing the recognition criteria is a contingent liabilityCorrect
  3. CRecognise a provision and later reverse it if the estimate changes
  4. DIgnore it completely because no estimate is available

Explanation

Ind AS 37 states that contingent liabilities include present obligations that fail the recognition criteria because a sufficiently reliable estimate cannot be made. Recognition of a provision requires a reliable estimate. So the item is a contingent liability and not a provision. Ignoring it completely is wrong because it is not a remote item that escapes disclosure.

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