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

Kaveri Textiles Ltd faces a claim from a customer. Legal counsel advises that it is not probable that Kaveri has a present obligation, but it cannot be ruled out. Which treatment fits the Standard's distinction?

The claim is a possible obligation, because it is yet to be confirmed whether Kaveri has a present obligation that could lead to an outflow of resources. Under Ind AS 37 this is a contingent liability and is not recognised as a liability.

  1. ARecognise a provision because the claim exists at the reporting date
  2. BTreat it as a possible obligation, which is a contingent liability and not recognised as a liabilityCorrect
  3. CIgnore it entirely as it can never be a liability
  4. DRecognise it as a contingent asset

Explanation

A contingent liability includes a possible obligation where it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow. Such an item is not recognised as a liability. Option A is wrong because a provision needs a present obligation.

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