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

Sundaram Textiles Ltd. is sued by a customer for alleged defective fabric. At the reporting date, the company's lawyers say it is not yet clear whether the company has any present obligation to the customer, as the facts are disputed and will be settled by the court. Under Ind AS 37, how should this matter be treated?

The matter is a contingent liability. The company has only a possible obligation, because it is not yet confirmed whether a present obligation exists that could lead to an outflow of economic benefits. Ind AS 37 does not recognise such items as liabilities, so no provision is made.

  1. ARecognise a provision, because every lawsuit creates a present obligation
  2. BTreat it as a contingent liability, because it is a possible obligation whose existence is yet to be confirmedCorrect
  3. CTreat it as a contingent asset, because the company may win the case
  4. DIgnore it completely, since contingent matters are never disclosed

Explanation

Ind AS 37 (para 13) treats a possible obligation, where it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow, as a contingent liability. It is not recognised as a liability. Recognising a provision is wrong because the existence of a present obligation is not yet confirmed.

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