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

Sharma Textiles Ltd faces a warranty claim on a large batch of goods sold. Past experience shows the single obligation will settle at Rs 8,00,000 with probability 70% or at Rs 12,00,000 with probability 30%. Under Ind AS 37, applying the most-likely-outcome approach for a single obligation, the provision to be recognised is:

The provision is Rs 8,00,000. For a single obligation the most likely outcome is generally the best estimate, and 70% probability makes Rs 8,00,000 the most likely. The Rs 9,20,000 expected value is meant for large populations of items, not one obligation.

  1. ARs 8,00,000Correct
  2. BRs 9,20,000
  3. CRs 12,00,000
  4. DRs 10,00,000

Explanation

For a single obligation, the individual most likely outcome is the best estimate, which is Rs 8,00,000 (70% probability). The probability-weighted figure of 0.7x8,00,000 + 0.3x12,00,000 = Rs 9,20,000 is the expected value method, used for large populations of items, so it is not appropriate here.

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