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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, its lawyers say it has yet to be confirmed whether the company has any present obligation, though an outflow is possible if the court rules against it. How should Sundaram treat the matter under Ind AS 37?

The claim is a contingent liability and is not recognised as a liability. It is a possible obligation because it has yet to be confirmed whether a present obligation exists. A provision requires a present obligation, so only disclosure is made, not recognition.

  1. ARecognise a provision because the claim has been filed
  2. BTreat it as a contingent liability and not recognise it as a liabilityCorrect
  3. CTreat it as a contingent asset and disclose it
  4. DIgnore it completely since no outflow has occurred

Explanation

Under Ind AS 37 a possible obligation, where it has yet to be confirmed whether a present obligation exists, is a contingent liability. Contingent liabilities are not recognised as liabilities. A provision needs a present obligation, so option A is wrong. Disclosure is still required unless the outflow is remote, so ignoring it is wrong.

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