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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 to pay damages to a customer. An outflow is probable, but the company cannot make a sufficiently reliable estimate of the amount. Which statement correctly describes the treatment under Ind AS 37?

Kaveri should not recognise a provision and should treat the item as a contingent liability. Although a present obligation exists and outflow is probable, the recognition criteria are not met because a sufficiently reliable estimate cannot be made.

  1. ARecognise a provision at the maximum possible amount
  2. BDo not recognise a provision; treat it as a contingent liability because it is a present obligation not meeting the recognition criteriaCorrect
  3. CRecognise a provision only when payment is made
  4. DRecognise a contingent asset for the expected recovery

Explanation

A contingent liability includes present obligations that do not meet the recognition criteria, either because outflow is not probable or because a sufficiently reliable estimate cannot be made. Here no reliable estimate exists, so no provision is recognised and the item is a contingent liability. Recognising at maximum is not permitted.

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