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

Meghdoot Textiles Ltd is a defendant in a suit filed by a customer. Its lawyers say it is not yet certain whether the company owes anything under the contract, because a key fact will be settled only when the court decides the dispute. Applying the distinction drawn in Ind AS 37, how should this item be classified?

The item is a contingent liability. Ind AS 37 defines contingent liabilities to include possible obligations where it has yet to be confirmed whether a present obligation exists that could cause an outflow. Since existence of the obligation depends on the court's decision, it is not recognised as a liability.

  1. AA contingent liability, because it is a possible obligation whose existence is yet to be confirmedCorrect
  2. BA provision, because every uncertain liability must be recognised as a provision
  3. CA contingent asset, because the outcome depends on a court decision
  4. DA provision, because the timing of settlement is uncertain

Explanation

Ind AS 37 treats a possible obligation, where it is yet to be confirmed whether a present obligation exists that could lead to an outflow, as a contingent liability. It is therefore not recognised as a liability. Uncertain timing alone does not make it a provision, because a provision needs a present obligation and a probable outflow.

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