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Thread: 29 Accounting Standard 29 - Provisions, Contingent Liabilities and Contingent Assets - AS 29

  1. #11
    Accounting Standards
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    Default Contingent Assets of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Contingent Assets of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets


    30. An enterprise should not recognise a contingent asset.

    31. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.

    32. Contingent assets are not recognised in financial statements since this may result in the recognition of income thatmay never be realised.However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

    33. A contingent asset is not disclosed in the financial statements. It is usually disclosed in the report of the approving authority (Board of Directors in the case of a company, and, the corresponding approving authority in the case of any other enterprise), where an inflow of economic benefits is probable.

    34. Contingent assets are assessed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs.

  2. #12
    Accounting Standards
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    Default Measurement of Best Estimate of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Measurement of Best Estimate of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets


    35. The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The amount of a provision should not be discounted to its present value.


    36. The estimates of outcome and financial effect are determined by the judgment of the management of the enterprise, supplemented by experience of similar transactions and, in some cases, reports fromindependent experts.

    The evidence considered includes any additional evidence provided by events after the balance sheet date.

    37. The provision is measured before tax; the tax consequences of the provision, and changes in it, are dealt with under AS 22, Accounting for Taxes on Income.

  3. #13
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    Default Risks and Uncertainties of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Risks and Uncertainties of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets


    38. The risks and uncertainties that inevitably surround many events and circumstances should be taken into account in reaching the best estimate of a provision.


    39. Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgments under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However,
    uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision.

    40. Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 67(b).

  4. #14
    Accounting Standards
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    Default Future Events of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Future Events of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    41. Future events that may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that they will occur.

    42. Expected future events may be particularly important in measuring provisions. For example, an enterprise may believe that the cost of cleaning up a site at the end of its lifewill be reduced by future changes in technology. The amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all available evidence as to the technology that will be available at the time of the clean-up. Thus, it is appropriate to include, for example, expected cost reductions associatedwith increased experience in applying existing technology or the expected cost of applying existing technology to a larger ormore complex clean-up operation than has previously been carried out. However, an enterprise does not anticipate the development of a completely new technology for cleaning up unless it is supported by sufficient objective evidence.

    43. The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that arise in practice usually makes it impossible to specify
    a single event that will provide sufficient, objective evidence in every case.Evidence is required both of what legislation will demand and of whether it is virtually certain to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new legislation is
    enacted.

  5. #15
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    Default Expected Disposal of Assets of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Expected Disposal of Assets of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets


    44. Gains from the expected disposal of assets should not be taken into account in measuring a provision.

    45. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an enterprise recognises gains on expected disposals of assets at the time specified by theAccounting Standard dealing with the assets concerned.

  6. #16
    Accounting Standards
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    Default Reimbursements of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Reimbursements of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets


    46. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation.

    The reimbursement should be treated as a separate asset. The amount recognised for the reimbursement should not exceed the amount of the provision.

    47. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

    48. Sometimes, an enterprise is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). The other party may either reimburse amounts paid by the enterprise or pay the amounts directly.

    49. In most cases, the enterprise will remain liable for the whole of the amount in question so that the enterprise would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when it is virtually certain that reimbursement will be received if the enterprise settles the liability.

    50. In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such a case, the enterprise has no liability for those costs and they are not included in the provision.

    51. As noted in paragraph 28, an obligation forwhich an enterprise is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties.

  7. #17
    Accounting Standards
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    Default Changes in Provisions , Use of Provisions of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Changes in Provisions
    52. Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefitswill be required to settle the obligation, the provision should be reversed.

    Use of Provisions
    53. A provision should be used only for expenditures for which the provision was originally recognised.

    54. Only expenditures that relate to the original provision are adjusted against it. Adjusting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events.

  8. #18
    Accounting Standards
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    Default Application of theRecognition andMeasurement Rules of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Application of theRecognition andMeasurement Rules of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Future Operating Losses

    55. Provisions should not be recognised for future operating losses.

    56. Future operating losses do notmeet the definition of a liability in paragraph 10 and the general recognition criteria set out for provisions in paragraph 14.

    57. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An enterprise tests these assets for impairment under Accounting Standard (AS) 28, Impairment of Assets.

  9. #19
    Accounting Standards
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    Default Restructuring of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Restructuring Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets


    58. The following are examples of events thatmay fall under the definition of restructuring:

    (a) sale or termination of a line of business;

    (b) the closure of business locations in a country or region or the relocation of business activities from one country or region to another;

    (c) changes inmanagement structure, for example, eliminating a layer of management; and

    (d) fundamental re-organisations that have a material effect on the nature and focus of the enterprise’s operations.

    59. A provision for restructuring costs is recognised only when the recognition criteria for provisions set out in paragraph 14 are met.

    60. No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e., there is a binding sale agreement.

    61. An enterprise cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement.Until there is a binding sale agreement, the enterprise will be able to change itsmind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for impairment under Accounting Standard (AS) 28, Impairment of Assets.

    62. A restructuring provision should include only the direct expenditures arising from the restructuring which are those that are both:

    (a) necessarily entailed by the restructuring; and

    (b) not associated with the ongoing activities of the enterprise.

    63. A restructuring provision does not include such costs as:

    (a) retraining or relocating continuing staff;

    (b) marketing; or

    (c) investment in new systems and distribution networks.

    These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the balance sheet date. Such expenditures are recognised on the same basis as if they arose independently of a restructuring.

    64. Identifiable future operating losses up to the date of a restructuring are not included in a provision.

    65. As required by paragraph 44, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring.

  10. #20
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    Default Disclosure of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    Disclosure of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    66. For each class of provision, an enterprise should disclose:

    (a) the carrying amount at the beginning and end of the period;
    (b) additional provisions made in the period, including increases to existing provisions;
    (c) amounts used (i.e. incurred and charged against the provision) during the period; and
    (d) unused amounts reversed during the period.


    67. An enterprise should disclose the following for each class of provision:

    (a) a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;

    (b) an indication of the uncertainties about those outflows. Where necessary to provide adequate information, an enterprise should disclose the major assumptions made concerning future events, as addressed in paragraph 41; and

    (c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.

    68. Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each class of contingent liability at the balance sheet date a brief description of the nature of the contingent liability and, where practicable:

    (a) an estimate of its financial effect, measured under paragraphs 35-45;

    (b) an indication of the uncertainties relating to any outflow; and

    (c) the possibility of any reimbursement.

    69. In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary to consider whether the nature of the items is sufficiently similar for a single statement about themto fulfill the requirements of paragraphs 67 (a) and (b) and 68 (a) and (b). Thus, it may
    be appropriate to treat as a single class of provision amounts relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to normal warranties and amounts that are subject to legal proceedings.

    70. Where a provision and a contingent liability arise from the same set of circumstances, an enterprise makes the disclosures required by paragraphs 66-68 in a way that shows the link between the provision and the contingent liability.

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

    72. In extremely rare cases, disclosure of some or all of the information required by paragraphs 66-70 can be 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. In such cases, an enterprise
    need not disclose the information, but should disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.

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