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

Sagar Pharma Ltd faces a lawsuit. Legal counsel confirms that the company has a present obligation, but considers it not probable that an outflow of resources will be required. Which treatment is correct under Ind AS 37?

Sagar Pharma should not recognise a liability. A present obligation for which an outflow of economic benefits is not probable fails the recognition criteria, so under Ind AS 37 it is treated as a contingent liability, not a provision.

  1. ARecognise a provision because a present obligation exists
  2. BRecognise a provision at the best estimate, treating the lawsuit as a possible obligation
  3. CDo not recognise a liability; it is a contingent liability because the present obligation does not meet the recognition criteria as an outflow is not probableCorrect
  4. DRecognise a contingent asset equal to the expected claim

Explanation

A present obligation with an outflow that is not probable fails the recognition criteria, so it is a contingent liability and is not recognised as a liability. Option A ignores the probability condition. Option B wrongly calls it a possible obligation and recognises it.

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