Provisions, Contingent Liabilities and Contingent Assets AS-29

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(1)

AS-29

Provisions, Contingent Liabilities and Contingent

Assets

(2)

Content of the Presentation

Objective of the Standard

Applicability

Scope of the Standard

Definitions explained

Recognition criteria - Provisions

Observations/Other points - Provisions

Recognition criteria - Contingencies

Observations/Other points - Contingencies

Measurement of Provisions

Other Points

Disclosure requirement

Comparison with AS 4

Decision table - Summarized position

Comparison with IAS

Comparison with US GAAP

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(3)

Objective of the Standard

Ensuring that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities

Incorporation of sufficient information in financial statements to enable users to understand the nature, timing and amount of provisions and contingent liabilities

Laying down appropriate accounting for contingent assets

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(4)

Applicability of the Standard

It comes into effect in respect of accounting periods commencing on or after 1st April

2004

Entire AS is applicable to (category a):

Enterprises whose equity or debt securities are listed in India or outside India

Enterprises which are in the process of listing

Banks including co-operative banks

Financial institutions

Enterprises carrying on insurance business

Enterprises whose turnover in immediately

preceding financial year is more than Rs. 50 Crs

Enterprises having borrowings in excess of rs. 10 crs at any time during the accounting period

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

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Applicability of the Standard (contd...)

Entire AS, except disclosure requirement of para 67, is applicable to (category b):

Enterprises whose turnover in immediately

preceding financial year is more than Rs. 40 Lacs but is not more than Rs. 50 Crs

Enterprises having borrowings in excess of Rs. 1 Cr. But not in excess of Rs. 10 Crs at any time

during the accounting period

Holding and subsidiary enterprises of any one of the above at any time during the accounting

period

Entire AS, except disclosure requirement of para 66 & 67, is applicable to all other

enterprises (category c)

contd...

(6)

Other Points Regarding Applicability

Enterprise once covered in category a and subsequently ceases to be so covered will not get exemption from para 67 until the enterprise ceases to be covered in category a for two consecutive years

Enterprise once covered in category a or b and subsequently ceases to be so covered will not get exemption from paras 66 & 67 until the enterprise ceases to be covered in category a and b for two consecutive years

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(7)

Other Points Regarding Applicability

(contd…)

Enterprise once covered in category c and subsequently ceases to be so covered in the current accounting period, this standard applies in its entirety (if it subsequently falls in category a) or in its entirety except para 67 (if it subsequently falls in category b), as the case may be, from the current accounting period. However, the relevant corresponding previous period figures need not be disclosed

contd...

(8)

Other Points Regarding Applicability

(contd…)

If pursuant to the above provisions an enterprise does not disclose information required by para 67 or paras 66 and 67, it should disclose such fact

From the date of applicability of this Standard all paras of AS 4 Contingencies and Events Occurring After the Balance Sheet Date that deal with contingencies (paras 1(a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1 to 5.6), 6, 7, 9.1(relevant portion), 9.2, 10, 11, 12 and 16) shall stand withdrawn

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AS 29 Provisions, Contingent Liabilities and Contingent Assets

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Scope of the Standard

Standard should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets

Statement does not apply to provisions, contingent liabilities and contingent assets:

Resulting from financial instruments that are carried at fair value

Resulting from executory contracts

Arising in insurance enterprises from contracts with policy holders and

Covered by another accounting standard

contd...

(10)

Scope of the Standard (contd…)

Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent

Examples of provisions dealt with by another standard are:

AS 7 construction contracts

AS 22 accounting for taxes on income

AS 19 leases

AS 15 accounting for retirement benefits in the financial statements of employers

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(11)

Scope of the Standard (contd…)

This statement does not address recognition of revenue i.e. it does not change the requirements of AS 9 revenue recognition

The term provision (as used in this standard) does not include depreciation, impairment loss and doubtful debts

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Definitions explained

A Provision is:

A liability

Which can be measured only by using a substantial degree of estimation

A Liability is:

Present obligation arising from past events

Settlement of which is expected to result in outflow of resources embodying

economic benefits

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(13)

Definitions explained (contd…)

An Obligating Event is:

An event that creates an obligation

That results in an enterprise having no realistic alternative to settling that obligation

A Possible Obligation is an obligation

the existence of which (based on the

evidence available) at the balance

sheet date is considered not probable.

contd...

(14)

Definitions explained (contd…)

A Present Obligation is an obligation the existence of which (based on the evidence available) at the balance sheet date is considered probable i.e. more likely than not

A Contingent Asset is:

A possible asset that arises from past events

The existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(15)

Definitions explained (contd…)

A Contingent Liability is:

A possible obligation

that arises from past events

the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise

A present obligation that arises from past events but is not recognised because:

It

is nor probable that an outflow of economic

resources will be required to settle the obligation or

A reliable estimate of the amount of the obligation

cannot be made

contd...

(16)

Definitions explained (contd…)

A Restructuring Programme is a programme:

that is planned and controlled by management and

that materially changes either:

the scope of a business undertaken by an enterprise

the manner in which that business is conducted

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AS 29 Provisions, Contingent Liabilities and Contingent Assets

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Recognition criteria - Provisions

Para 14 of AS states that a Provision should be recognised when:

an enterprise has a present obligation as a result of a past event

it is probable that an outflow of economic resources embodying economic benefits will be required to settle the obligation and

a reliable estimate can be made of the amount of the obligation

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(18)

Observations/other points - Provisions

On the basis of evidence available on the balance sheet date and after considering additional evidence provided by events occurring after the balance sheet date:

where it is more likely than not that a present obligation exists at the balance sheet date, the enterprise recognises a provision if:

the settlement of obligation will result in outflow of economic resources and

a reliable estimate of the amount can be made

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(19)

Observations/other points - Provisions

(contd…)

where it is more likely that no present obligation exists at the balance sheet date, the enterprise discloses a contingent liability, unless the possibility of an outflow of economic resources is remote

Only present obligations arising out of past events should be considered

No provision should be recognised for costs that need to be incurred to operate in future

contd...

(20)

Observations/other points - Provisions

(contd…)

An obligations always involves another party to whom obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed

An outflow of economic resources or other event is regarded as probable if the probability that the event will occur is greater than the probability that it will not

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(21)

Observations/other points - Provisions

(contd…)Except in extremely rare cases, an enterprise will be able to determine a range of possible outcomes and can therefore make can reliable estimate of the amount of provision

In extremely rare cases where it is not possible to make a reliable estimate, no provision is recognised and the liability is disclosed as contingent liability

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(22)

Recognition criteria - Contingencies

As per para 26 of AS an enterprise should not recognise a contingent liability

As per para 30 of AS an enterprise should not recognise a contingent asset

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AS 29 Provisions, Contingent Liabilities and Contingent Assets

(23)

Observations / other points - Contingencies

Where an enterprise is jointly and severally liable for an obligation:

provision (if the recognition criteria is met) should be made of the part of the obligation which has to be met by the enterprise

the part of the obligation that is expected to be met by other parties is treated as contingent liability

contd...

(24)

Observations/other points - Contingencies

(contd…)

Contingent Liabilities should be assessed continually to determine whether outflow of economic resources has become probable or not

The moment the outflow of economic resource becomes probable provision should be recognised if other recognition criteria is met

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(25)

Observations/other points - Contingencies

(contd…)When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate

A contingent asset is not disclosed in the financial statements

Contingent assets are assessed continually and the moment the inflow of economic resource becomes virtually certain, the asset and related income should be

recognised Return

(26)

Measurement of Provisions

Best Estimate:

The amount recognised as a provision should be the best estimate of the expenditure

It should not be discounted to its present value

It should be based on evidence available not only on the balance sheet date but also from the events occurring after the balance sheet date

The provision is measured before tax - tax consequences should be dealt in accordance with AS 22 Accounting for Taxes on Income

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(27)

Measurement of Provisions

(contd…)Risks and Uncertainties:

Risks and uncertainties that surround

events and circumstances should be taken into account in reaching the best estimate

Uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities

contd...

(28)

Measurement of Provisions (contd…)

Future Events:

Future events affecting the amount required to settle an obligation should be reflected in the amount of a provision if and only if there is sufficient objective evidence that they will occur

Expected Disposal of Assets:

Gains from the expected disposal of assets should not be taken into account in

measuring a provision

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(29)

Measurement of Provisions (contd…)

Reimbursements:

When the expenditure required to settle a provision is expected to reimbursed by another party, the reimbursement should be recognised

It should be recognised only if it is virtually certain that reimbursement will be received

Reimbursement should be treated as a separate asset

The amount of reimbursement should not exceed the amount of provision

contd...

(30)

Measurement of Provisions (contd…)

Changes in and Use of Provisions:

Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate

If after review it is identified that it does not meet the recognition criteria it should be reversed

Provision should be used only for expenditure for which the provision was originally recognised

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AS 29 Provisions, Contingent Liabilities and Contingent Assets

(31)

Other points Future Operating Losses:

Provisions should not be recognised for future operating losses

Future operating losses do not meet the definition of liability

Expectation of future operating losses is an indication that certain assets may be impaired and thus, these assets should be tested under AS 28 Impairment of Assets

contd...

(32)

Other points (contd…)

Restructuring:

Provision for restructuring costs is recognised only when the recognition criteria for provisions are met

A restructuring provision should include only the direct expenditure arising from the restructuring and which are:

necessarily entailed by the restructuring and

not associated with the ongoing activities of the enterprise

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(33)

Other points (contd…)

Restructuring (contd…) :

Examples of restructuring are:

sale or termination of a line of business

the closure of business locations in a country or region

relocation of business activities

changes in management structure

fundamental re-organisations that have a material effect on the operations

contd...

(34)

Other points (contd…)

Restructuring (contd…) :

Restructuring provision does not include such costs as:

retraining or relocating continuing staff

marketing or

investment in new systems and distribution networks

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AS 29 Provisions, Contingent Liabilities and Contingent Assets

(35)

Disclosure For each class of provision, the following

should be disclosed (para 66 of the AS) :

carrying amount at beginning and end of the period

additional provisions made in the period

amount used during the period

unused amounts reversed during the period

contd...

(36)

Disclosure (contd…)

For each class of provision, the following should be disclosed (para 67 of the AS) :

brief description of the nature of the obligation and expected timing of any resulting outflow of economic resources

an indication of the uncertainties about those outflows and major assumptions concerning future events

the amount of expected reimbursement, stating the amount recognised as an asset for expected reimbursement

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(37)

Disclosure (contd…)

Unless the possibility of outflow of economic resources is remote, for each class of contingent liability, the following should be disclosed (para 68 of the AS) :

brief description of the nature of contingent liability

an estimate of financial effect

an indication of the uncertainties relating to any outflow

the possibility of any reimbursement

contd...

(38)

Disclosure (contd…)

Where any of the information required by para 68 is not disclosed because it is not practicable to do so, that fact should be stated

If the disclosure of information are required in the Standard, is expected to prejudice seriously the position of the enterprise in a dispute with other parties on the subject matter of the provision or contingent liability, enterprise need not disclose the information

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(39)

Disclosure (contd…)

If as per above, the enterprise does not disclose the information, it is required to disclose

the general nature of the dispute

reason why the information has not been disclosed

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(40)

Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet

Date AS 29 AS 4

Definition of Contingent Liability and Contingent Asset separated

Contingent Liability and Contingent Asset included in the definition of

‘Contingency’

The term ‘Provision’ clearly distinguished from

‘Contingent Liability’ and thus both the terms have been elaborated

No express segregation of the term ‘Provision’ from the term of ‘Contingent Liability’

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(41)

Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…)

AS 29 AS 4

Only if there is a present obligation and there will be outflow of economic resources (to settle it) which can be reliably estimated, provision should be made

If it is probable that contingency will result in a loss (an asset impaired or liability incurred), provision should be made

Provision once made should be reviewed at each Balance Sheet date to see whether it sill meets the recognition criteria

No such express requirement mentioned

contd...

(42)

Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…)

AS 29 AS 4

Measurement of amount of provision should be:

 Based on best estimate

 After considering risks and uncertainties

 After considering future events

 Made without

considering expected disposal of assets

 After taking into account reimbursements

No such detailed measurement principles laid down

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(43)

Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…)

AS 29 AS 4

Provision can be made for Restructuring activities if it meets the recognition criteria

No such specific activity included in the Standard

Provision should be used only for expenditure for which the provision was originally recognised

No such express requirement mentioned in the Standard

Detailed disclosure requirement for the Provisions made

No disclosure requirement for contingent liability for which provision is made

contd...

(44)

Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…)

AS 29 AS 4

If the disclosure of information will prejudicially affect the interest of the enterprise (in a dispute with third party) the same may not be disclosed. However, general nature of dispute and the reason for non- disclosure should be mentioned

No such concession given by the Standard

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AS 29 Provisions, Contingent Liabilities and Contingent Assets

(45)

Decision Table - Position Summarized Situation 1 Situation 2 Situation 3

There is a present obligation that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation.

There is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources.

There is a possible obligation or a present obligation

where the

likelihood of an

outflow of

resources is remote.

Action 1 Action 2 Action 3

A provision is recognised (para 14).

Disclosures are required for the provision (paras 66 and 67)

No provision is recognised (para 26).

Disclosures are required for the contingent liability (para 68).

No provision is recognised (para 26).

No disclosure is required (para 68).

Return

(46)

Comparison with International Accounting Standard

IAS 37 AS 29

Discounting of Provisions Where the effect of

time value of money is material the amount of provision should be discounted

The amount of provision should not be discounted to its present value

Contingent Assets Where the inflow of

economic benefits is probable, contingent assets should be disclosed in the financial statements

Contingent Assets are usually disclosed in the report of approving authority. No requirement of disclosing it in financial statements

contd...

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(47)

Comparison with International Accounting Standard (contd…)

IAS 37 AS 29

Onerous Contracts Present obligation under

an Onerous Contract should be recognised as provision. Onerous Contract is a contract in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it

No such requirement incorporated in AS 29

contd...

(48)

Comparison with International Accounting Standard (contd…)

IAS 37 AS 29

Constructive Obligation IAS deals with

‘constructive obligation’ in the context of creation of provision. For example, in case of a restructuring, a constructive obligation arises when an enterprise has a detailed formal plan for restructuring. Thus, in this case provision is recognised at an early stage

Requirement of

recognising constructive obligation has been omitted by AS 29.

Return

AS 29 Provisions, Contingent Liabilities and Contingent Assets

(49)

Comparison with US GAAP - FASB Statement No. 5 - Accounting for Contingencies

US GAAP AS 29

If the estimated amount of loss is within a range, provision should be based on best estimate. If best estimate cannot be made, minimum amount should be provided with a disclosure of maximum amount.

No such express requirement. However, all risks and uncertainties should be considered in reaching best estimate.

Uncertainty does not justify creation of higher amount of provision. Thus, in case of uncertainty lower amount should be provided with no disclosure of higher amount

contd...

(50)

AS 29 Provisions, Contingent Liabilities and Contingent Assets

Comparison with US GAAP - FASB Statement No. 5 - Accounting for Contingencies (contd…)

US GAAP AS 29

No provision should be made for general /unspecified

contingencies such as seIf-insurance etc.

However, footnote disclosure and/or appropriation of retained earnings can be made for such contingencies.

No provision can be made for general /unspecified contingencies. Disclosure of such contingencies is also not encouraged.

contd...

(51)

Comparison with US GAAP - FASB Statement No. 5 - Accounting for Contingencies (contd…)

US GAAP AS 29

Unasserted claims exist when the claimant has elected not to assert the claim or because the claimant lacks knowledge of existence of claim. If it is probable that outcome of such claims (if made) will be unfavourable, the unasserted claim should be disclosed in the financial statements

No such requirement incorporated in the Standard

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(52)

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