Skip to content

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

Sahyadri Textiles Ltd is defending a customer's claim over defective fabric. Its lawyers say it has yet to be confirmed whether the company has any present obligation that could lead to an outflow of resources. Under Ind AS 37, how should the claim be treated in the financial statements?

The claim is a contingent liability. Ind AS 37 treats a possible obligation, where it is not yet confirmed whether a present obligation exists that could cause an outflow, as contingent and not recognised as a liability. It is disclosed instead.

  1. ARecognise a provision because all provisions are uncertain in timing or amount
  2. BRecognise a provision at the claim amount to be prudent
  3. CTreat it as a contingent liability, because it is a possible obligation whose existence is yet to be confirmedCorrect
  4. DIgnore it, as contingent liabilities never require any disclosure

Explanation

Under Ind AS 37, a possible obligation, where it is yet to be confirmed whether a present obligation exists that could lead to an outflow, is a contingent liability and is not recognised as a liability. Option A is wrong because uncertainty in timing or amount alone does not make an item a provision; a present obligation is needed. Disclosure of the contingent liability is still required unless an outflow is remote.

Did you get it right without looking?

One question tells you little. A timed set on Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets shows your real accuracy, how long you take and where you lose marks.

Practise Ind AS 37 Provisions, Contingent Liabilities and Contingent AssetsFree diagnostic mock

More Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets questions