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

Narmada Constructions Ltd. has a Rs 50 lakh claim pending against it for delay in a project. Its lawyers say the company will probably lose, and the best estimate of the outflow is Rs 30 lakh. The company also expects to recover Rs 12 lakh from its insurer, and it is virtually certain that the insurer will pay this amount. How should this be treated in the financial statements for the year?

Recognise a provision of Rs 30 lakh and a separate reimbursement asset of Rs 12 lakh, since the loss is probable and the insurance recovery is virtually certain. The profit and loss charge may be shown net at Rs 18 lakh, but the balance sheet must not net them.

  1. AProvision Rs 30 lakh and a separate asset (reimbursement) Rs 12 lakh; the expense in the statement of profit and loss may be shown net at Rs 18 lakhCorrect
  2. BProvision Rs 18 lakh only, with no separate asset
  3. CProvision Rs 50 lakh and a contingent asset of Rs 12 lakh disclosed
  4. DContingent liability of Rs 30 lakh disclosed and no provision

Explanation

Loss is probable, so a provision at the best estimate of Rs 30 lakh is required. Reimbursement that is virtually certain is recognised as a separate asset, not netted against the provision in the balance sheet, though the profit and loss expense may be presented net of it (Rs 18 lakh). Netting the provision itself, as in the second option, is not allowed.

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