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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Kaveri Engineering Ltd. is sued by a customer for Rs 12,00,000. At the year-end the company's lawyers advise that it is more likely than not that the claim will fail, but there is a real possibility of loss. The financial statements are approved before the court decides. What is the correct treatment under AS 29 (Revised)?

The Rs 12,00,000 claim should be disclosed as a contingent liability in the notes without making any provision. The outflow is not probable because the claim will likely fail, but it is not remote either, so disclosure is required.

  1. AProvide Rs 12,00,000 as a liability
  2. BProvide Rs 6,00,000, being half of the claim
  3. CDisclose Rs 12,00,000 as a contingent liability by way of note, with no provisionCorrect
  4. DMake no disclosure since the claim will probably fail

Explanation

Outflow is not probable, so no provision is made. Since the possibility of outflow is not remote, the obligation is disclosed as a contingent liability with a brief description and estimate of financial effect. No disclosure would be needed only if the possibility were remote.

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