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

  1. #1
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    Default 29 Accounting Standard 29 - Provisions, Contingent Liabilities and Contingent Assets - AS 29

    Accounting Standard (AS) 29 (issued 2003)

    Provisions, Contingent Liabilities and Contingent Assets
    (This Accounting Standard includes paragraphs set in
    bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards.)

    Accounting Standard (AS) 29,
    ‘Provisions, Contingent Liabilities and Contingent Assets’, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004. This Standard is mandatory in naturefrom that date:

    (a) in its entirety, for the enterprises which fall in any one or more of the following categories, at any time during the accounting period:

    (i) Enterprises whose equity or debt securities are listed whether in India or outside India.

    (ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of
    directors’

    resolution in this regard.

    (iii) Banks including co-operative banks.

    (iv) Financial institutions.

    (v) Enterprises carrying on insurance business.

    (vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include
    ‘other income’.

    (vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at any time during the accounting period.

    (viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

    (b) in its entirety, except paragraph 67, for the enterprises which do not fall in any of the categories in (a) above but fall in any one or more of the following categories:

    (i) All commercial, industrial and business reportingenterprises, whose turnover for the immediately preceding accounting
    period on the basis of audited financial statements exceeds Rs. 40 lakh but does not exceed Rs. 50 crore. Turnover
    does not include
    ‘other income’.

    (ii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of
    Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting period.

    (iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

    (c) in its entirety, except paragraphs 66 and 67, for the enterprises, which do not fall in any of the categories in (a) and (b) above. Where an enterprise has been covered in any one or more of the categories in (a) above and subsequently, ceases to be so covered, the enterprise will not qualify for exemption from paragraph 67 of this Standard, until the
    enterprise ceases to be covered in any of the categories in (a) above for two consecutive years.

    Where an enterprise has been covered in any one or more of the categories in (a) or (b) above and subsequently, ceases to be covered in any of the categories in (a) and (b) above, the enterprise will not qualify for exemption from paragraphs 66 and 67 of this Standard, until the enterprise ceases to be covered in any of the categories in (a) and (b) above for two consecutive years. Where an enterprise has previously qualified for exemption from paragraph 67 or paragraphs 66 and 67, as the case may be, but no longer qualifies for exemption from paragraph 67 or paragraphs 66 and 67, as the case may be, in the current accounting period, this Standard becomes applicable, in its entirety or, in its entirety except paragraph 67, as the case may be, from the current period.However, the relevant corresponding previous period figures
    need not be disclosed. An enterprise,which, pursuant to the above provisions, does not disclose the information required by paragraph 67 or paragraphs 66 and 67, as the case may be, should disclose the fact.

    From the date of thisAccounting Standard becomingmandatory (in its entirety or with the exception of paragraph 67 or paragraphs 66 and 67, as the case may be), all paragraphs of Accounting Standard (AS) 4, Contingencies and
    Events OccurringAfter the Balance SheetDate, that dealwith contingencies (viz., paragraphs 1 (a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1 to 5.6), 6, 7 (7.1 to 7.3),

    9.1 (relevant portion), 9.2, 10, 11, 12 and 16), stand withdrawn.


    The following is the text of the Accounting Standard.

  2. #2
    Accounting Standards
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    Default Objective of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

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


    The objective of this Statement is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.
    The objective of this Statement is also to lay down appropriate accounting for contingent assets.

  3. #3
    Accounting Standards
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    Default Scope of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

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

    1. This Statement should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets, except:

    (a) those resulting from financial instruments4 that are carried at fair value;

    (b) those resulting from executory contracts, except where the contract is onerous ;

    (c) those arising in insurance enterprises from contracts with policy-holders; and

    (d) those covered by another Accounting Standard.

    2. This Statement applies to financial instruments (including guarantees) that are not carried at fair value.

    3. 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. This Statement does not apply to executory contructs unless they are onerous.

    4. This Statement applies to provisions, contingent liabilities and contingent assets of insurance enterprises other than those arising from contracts with policy-holders.

    5. Where another Accounting Standard deals with a specific type of provision, contingent liability or contingent asset, an enterprise applies that Statement instead of this Statement. For example, certain types of provisions are also addressed in Accounting Standards on:

    (a) construction contracts (see AS 7, Construction Contracts);

    (b) taxes on income (see AS 22, Accounting for Taxes on Income);

    (c) leases (see AS 19, Leases). However, as AS 19 contains no specific requirements to deal with operating leases that have become onerous, this Statement applies to such cases; and

    (d) retirement benefits (see AS 15, Accounting for Retirement Benefits in the Financial Statements of Employers).

    6. Some amounts treated as provisions may relate to the recognition of revenue, for example where an enterprise gives guarantees in exchange for a fee. This Statement does not address the recognition of revenue. AS 9, Revenue Recognition, identifies the circumstances in which revenue is
    recognised and provides practical guidance on the application of the recognition criteria. This Statement does not change the requirements of AS 9.

    7. This Statement defines provisions as liabilities which can bemeasured only by using a substantial degree of estimation. The term‘provision’ is also used in the context of items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed in this Statement.


    8. Other Accounting Standards specify whether expenditures are treated as assets or as expenses. These issues are not addressed in this Statement. Accordingly, this Statement neither prohibits nor requires capitalisation of the costs recognised when a provision is made.

    9. This Statement applies to provisions for restructuring (including discontinuing operations). Where a restructuring meets the definition of a discontinuing operation, additional disclosures are required by AS 24, DiscontinuingOperations.

  4. #4
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    Default Definitions of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

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

    10. The following terms are used in this Statement with the meanings specified:

    A provision is a liability which can be measured only by using a substantial degree of estimation.

    A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
    An obligating event is an event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation. A contingent liability is:

    (a) a possible obligation that arises from past events and 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; or

    (b) a present obligation that arises from past events but is not recognised because:

    (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

    (ii) a reliable estimate of the amount of the obligation cannot be made.

    A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise.

    Present obligation - an obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e., more likely than not. Possible obligation - an obligation is a possible obligation if, based on the evidence available, its existence at the balance sheet date is considered not probable.


    A restructuring is a programme that is planned and controlled by management, and materially changes either:

    (a) the scope of a business undertaken by an enterprise; or

    (b) the manner in which that business is conducted.

    11. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement.Obligations also arise fromnormal business practice, customand a desire to maintain good business relations or act in an equitable manner.

    12. Provisions can be distinguished from other liabilities such as trade payables and accruals because in the measurement of provisions substantial degree of estimation is involvedwith regard to the future expenditure required in settlement. By contrast:

    (a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and

    (b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees.
    Although it is sometimes necessary to estimate the amount of accruals, the degree of estimation is generally much less than that for provisions.

    13. In this Statement, the term‘contingent’ is used for liabilities and assets that are not recognised because their existence 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. In addition, the term ‘contingent
    liability’ is used for liabilities that do not meet the recognition criteria.

  5. #5
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    Default Recognition of Provision of Accounting Standard (AS) 29

    Recognition of Provisions

    Provisions

    14. A provision should be recognised when:

    (a) an enterprise has a present obligation as a result of a past event;

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

    (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.

  6. #6
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    Default Present Obligation of Accounting Standard (AS) 29

    Present Obligation


    15. In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a lawsuit, itmay be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an enterprise determines whether a present obligation exists at the balance sheet date by taking account of all available evidence, including, for example, the opinion of experts.The evidence considered includes any additional evidence provided by events after the balance sheet date. On the basis of such evidence:

    (a) where it is more likely than not that a present obligation exists at the balance sheet date, the enterprise recognises a provision (if the recognition criteria are met); and

    (b) 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 resources embodying economic benefits is remote (see paragraph 68).

  7. #7
    Accounting Standards
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    Default Past Event of Accounting Standard (AS) 29

    Past Event

    16. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event.

    17. Financial statements deal with the financial position of an enterprise at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future.The onlyliabilities recognised in an enterprise’s balance
    sheet are those that exist at the balance sheet date.

    18. It is only those obligations arising frompast events existing independently of an enterprise’s future actions (i.e. the future conduct of its business) that are recognised as provisions. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the enterprise. Similarly, an enterprise recognises a provision for the decommissioning costs of an oil installation to the extent that the enterprise is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal requirements, an enterprise may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory).

    Because the enterprise can avoid the future expenditure by its future actions,for example by changing itsmethod of operation, it has no present obligation for that future expenditure and no provision is recognised.


    19. An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed – indeed the obligation may be to the public at large.

    20. An event that does not give rise to an obligation immediatelymay do so at a later date, because of changes in the law. For example, when environmental damage is caused there may be no obligation to remedy the consequences. However, the causing of the damagewill become an obligating event when a new law requires the existing damage to be rectified.

    21. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted. Differences in circumstances surrounding enactment usually make it impossible to specify a single event that would make the enactment of a law
    virtually certain. In many cases itwill be impossible to be virtually certain of the enactment of a law until it is enacted.

  8. #8
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    Default ProbableOutflowofResources Embodying Economic Benefits of Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

    ProbableOutflowofResources Embodying Economic Benefits


    22. For a liability to qualify for recognition theremust be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Statement, an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, i.e., the probability that the event will occur is greater than the probability that it will not. Where it is not probable that a present obligation exists, an enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 68).


    23. Where there are a number of similar obligations (e.g. productwarranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one itemmay be small, itmaywell
    be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if theother recognition criteria are met).

  9. #9
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    Default Reliable Estimate of the Obligation of Accounting Standard (AS) 29 Provisions, contingent liabilities and contingent Assets

    Reliable Estimate of the Obligation


    24. The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature involve a greater degree of estimation than most other items. Except in extremely rare cases, an
    enterprise will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is reliable to use in recognising a provision.

    25. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 68).

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

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


    26. An enterprise should not recognise a contingent liability.

    27. A contingent liability is disclosed, as required by paragraph 68, unless the possibility of an outflow of resources embodying economic benefits is remote.

    28. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. The enterprise recognises a provision for the part of the obligation forwhich an outflowof resources embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate can be made (see paragraph 14).

    29. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflowof future economic benefitswill be required for an item previously dealt with as a contingent liability, a provision is recognised in accordance with paragraph 14 in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).

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