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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Sundaram Textiles Ltd. gave a guarantee in April 2025 for a bank loan taken by its associate. At the balance sheet date, the associate is servicing the loan regularly and the bank has not invoked the guarantee. Legal advisers say that an outflow is possible but not probable. The guarantee amount is Rs 40 lakh. How should Sundaram Textiles treat this under AS 29 (Revised)?

The guarantee of Rs 40 lakh is disclosed as a contingent liability in the notes. Outflow is only possible, not probable, so the recognition criteria for a provision are not met. AS 29 requires disclosure of the nature and estimated financial effect, not recognition in the books.

  1. ARecognise a provision of Rs 40 lakh
  2. BRecognise a provision of Rs 20 lakh, being 50% of the amount
  3. CDisclose a contingent liability of Rs 40 lakh in the notesCorrect
  4. DIgnore the matter, since no disclosure is needed for guarantees

Explanation

A provision requires a present obligation with a probable outflow. Here the outflow is only possible, so the obligation is a contingent liability. It is not recognised in the books but is disclosed in the notes with the estimated financial effect, i.e. Rs 40 lakh. Recognising 50% is wrong because a provision cannot be created merely by splitting an amount when outflow is not probable.

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