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

Sundaram Textiles Ltd faces a customer claim. Management concludes that it is not probable that an outflow of resources will be required, though a present obligation exists and the amount can be estimated reliably at ₹8 lakh. How should the item be treated under Ind AS 37?

The claim is a contingent liability and is not recognised as a liability. It is a present obligation, but since an outflow of resources is not probable, it fails the recognition criteria. A reliable estimate of ₹8 lakh is not enough on its own to justify recognising a provision.

  1. ARecognise a provision of ₹8 lakh
  2. BTreat it as a contingent liability, not recognised as a liabilityCorrect
  3. CRecognise a provision of ₹4 lakh, being half the claim
  4. DRecognise it as a contingent asset

Explanation

Paragraph 13(b)(ii) says present obligations that fail the recognition criteria, because an outflow is not probable, are contingent liabilities and are not recognised as liabilities. A reliable estimate alone does not suffice. Recognising ₹8 lakh would ignore the probability test. Partial provisioning of ₹4 lakh has no basis in the standard.

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