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CMA Intermediate · Corporate Accounting and Auditing · Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Rohini Textiles Ltd has a present obligation from a past event relating to a customer's claim. An outflow of resources is probable, but the company cannot make a sufficiently reliable estimate of the amount. How does Ind AS 37 classify this item?

It is a contingent liability. Ind AS 37 states that present obligations which do not meet the recognition criteria, including where a sufficiently reliable estimate of the amount cannot be made, are contingent liabilities and are not recognised as provisions.

  1. AA provision, measured at zero
  2. BA contingent liability, because the recognition criteria are not metCorrect
  3. CA contingent asset, because the amount is unknown
  4. DA provision, recognised at the maximum possible amount

Explanation

A present obligation is a contingent liability if it fails the recognition criteria, which include the case where a sufficiently reliable estimate cannot be made. Provisions require a reliable estimate, so recognising a provision at zero or at a maximum is wrong.

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