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

Kaveri Pharma Ltd. has a legal case filed against it for patent infringement. Its lawyers say there is a 30% chance of losing, in which case damages of Rs 12,00,000 would be payable. How should the company treat this at the year-end under AS 29?

The company should disclose a contingent liability of Rs 12,00,000. Losing the case is possible but not probable, so no provision is recognised, yet because the chance is not remote, AS 29 requires disclosure of the nature and estimated financial effect.

  1. ARecognise a provision of Rs 3,60,000
  2. BRecognise a provision of Rs 12,00,000
  3. CDisclose a contingent liability of Rs 12,00,000 (estimate of financial effect)Correct
  4. DIgnore it since the outflow is not probable and no disclosure is needed

Explanation

A 30% chance means an outflow is not probable, so no provision arises. The possibility is not remote, so a contingent liability must be disclosed with an estimate of its financial effect, Rs 12,00,000. The 30% x 12,00,000 = Rs 3,60,000 is an expected-value approach, which is not applicable to a single obligation.

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