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

Under Ind AS 37, before a separate provision for an onerous contract is recognised, what must the entity first do?

Before creating a separate onerous contract provision, the entity first recognises any impairment loss that has occurred on assets used in fulfilling the contract, applying Ind AS 36. Only the remaining loss is then provided for under Ind AS 37, as stated in paragraph 69.

  1. ARecognise any impairment loss that has occurred on assets used in fulfilling the contractCorrect
  2. BDisclose the contract as a contingent asset
  3. CWrite off the contract's expected revenue against reserves
  4. DWait until the contract has been fully performed

Explanation

Paragraph 69 of Ind AS 37 requires an entity to recognise any impairment loss on assets dedicated to the contract (under Ind AS 36) before it sets up a separate provision for the onerous contract. Waiting for completion or disclosing a contingent asset is not what the standard requires.

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