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

Mahesh Pharma Ltd. is claiming Rs 25 lakh from an insurer for a fire damage to a godown, and the insurer has disputed the claim. At 31 March 2026, the company's lawyers say the claim is likely to succeed but a final decision is awaited. In May 2026, before the financial statements were approved, the court passed a final order in favour of Mahesh Pharma for Rs 25 lakh, and the insurer has paid the amount. How should this be treated in the financial statements for the year ended 31 March 2026?

Rs 25 lakh should be recognised as income and a receivable in the year ended 31 March 2026. The final court order before approval of the accounts makes realisation virtually certain and confirms a condition existing at the balance sheet date, so it is an adjusting event rather than a contingent asset.

  1. ADisclose as a contingent asset in the notes only
  2. BDo not recognise or disclose, as the receipt occurred after year end
  3. CRecognise the Rs 25 lakh as income and an asset, as realisation became virtually certain through an adjusting eventCorrect
  4. DRecognise Rs 12.5 lakh being 50% as the claim was only likely

Explanation

Contingent assets are not recognised, but when realisation of income becomes virtually certain, the related asset is no longer contingent and is recognised in the period of the change. The court order before approval of the financial statements gives evidence of conditions existing at the balance sheet date (the claim arose from the fire), so it is an adjusting event under AS 4. Hence Rs 25 lakh is recognised. Mere disclosure would apply only if inflow were probable but not virtually certain.

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