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

Sutlej Fabrics Ltd is defending a customer claim. Its lawyers advise that the company probably has no present obligation, but the court's decision will confirm this only in the future. Which description fits the claim under Ind AS 37?

The claim is a contingent liability. It is a possible obligation, and it has yet to be confirmed whether a present obligation exists that could lead to an outflow of economic benefits. It therefore fails the provision test of a present obligation and is not recognised as a liability.

  1. AA provision, because the outcome is uncertain in timing and amount
  2. BA contingent liability, because it is a possible obligation whose existence is yet to be confirmedCorrect
  3. CA contingent asset, because the company may win the case
  4. DA recognised liability measured at the claim amount

Explanation

Ind AS 37 treats a possible obligation, where it is yet to be confirmed whether a present obligation exists that could lead to an outflow, as a contingent liability. It is not recognised as a liability. Option A is wrong because a provision needs a present obligation and a probable outflow.

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