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

Kaveri Pharma Ltd. is defending a patent infringement suit. At the balance sheet date its lawyers advise that the likelihood of losing the case is remote, but if lost, damages would be about Rs 40 lakh. Separately, the company has filed a claim against a supplier for Rs 15 lakh, and legal opinion says recovery is virtually certain. How should these be treated under AS 29 (Revised)?

No provision or disclosure is needed for the Rs 40 lakh because the chance of loss is remote. The Rs 15 lakh claim is recognised as an asset because realisation is virtually certain, so it is no longer a contingent asset under AS 29 (Revised).

  1. AProvide Rs 40 lakh and disclose Rs 15 lakh as contingent asset
  2. BNeither provide nor disclose the Rs 40 lakh; the Rs 15 lakh is recognised as an asset since it is virtually certainCorrect
  3. CDisclose Rs 40 lakh as contingent liability and recognise Rs 15 lakh as income only on receipt
  4. DDisclose both as contingent items in the notes without recognising anything

Explanation

Where the possibility of outflow is remote, no provision and no disclosure of a contingent liability is required. A gain that is virtually certain is not a contingent asset, so the asset and related income are recognised. Disclosing the Rs 40 lakh would be wrong because the outflow is remote, not possible.

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