Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

download Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

of 13

  • date post

    03-Jun-2018
  • Category

    Documents

  • view

    215
  • download

    0

Embed Size (px)

Transcript of Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    1/13

    Accounting standard no

    Provisions, contingent,

    assets

    Vinod Kothari. .1012 Krishna224 AJC Bose RoadKolkata - 700 017. IndiaE-mail: vinod@vinodkothari.comPhone 91-33-22817715/ 228113742/22811276

    - -

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    2/13

    This Presentation is theproperty ofVinod Kothari and nopart of it can be copied,

    distributed in anymanner.

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    3/13

    Comparative international standards

    and hi hli hts IAS 37 Deals with

    Distinction between liabilities, provisions and contingent liabilities When to make provision for a liability, when to book a con tingent liability, when to take no

    action at all Gives several illustrations of si tuations about provisioning, contingent liability recognition

    Significant differences between IAS 37 and the present form of the AS or u ure a es, no presen va ua on s requ re un er Required under IAS 37

    5/27/2010 Free template from www.brainybetty.com 3

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    4/13

    Scope Those resulting from financial instruments carried at fair value

    Original text of the AS said, the AS applies to liabili ties arising out of financialinstruments too

    ,

    Hence, this s tandard does NOT now apply to financial instruments Some guarantees are covered by AS 30

    The statement does not apply to such guarantees too e s an ar oes no app y o a es un er execu ory con rac s

    Meaning of executory cont ract performance pending on the part of a party to acontract for example, obligation of a landlord to maintain a building

    That is , pending performance under a contract does not come as a liability or

    However, in case of onerous executory con tracts, provis ion may be required Onerous executory contract is one which exposes one party to a clear liability

    Does not apply to Liabil it of insurers under insurance contracts Liabilities dealt with by other standards

    For example construction con tracts Tax provisions Retirement benefits, etc

    5/27/2010 Free template from www.brainybetty.com 4

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    5/13

    Important definitions Provision a liability that can be measured using a substantial

    degree of estimation Liabil it - resent obli at ion for ast events, ex ected to result

    into an outflow Contingent liability

    Possible obligation from past events, existence of which will be

    within the control of the enterprise Present obl igation f rom past events, not recognised as liability

    because Reliable estimate of the amount of obligation cannot be made

    Contingent asset Possible asset that arises from past events, existence of which will be

    within the control of the enterprise Present versus probable

    More likely than not it is present

    5/27/2010 Free template from www.brainybetty.com 5

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    6/13

    Distinction between liabilities,

    rovisions and contin ent liabilit Liability is l iabili ty to make future payments

    For goods/services already received or obligations already

    Or accruals whole or part of the expense pertains to thecurrent period

    the liability is not an existing l iability Substantial Degree of estimation is required

    ere egree o es ma on requ re s ess, we crea e a a y Contingent

    Things are to happen in future whereby a liability may arise It is condit ional, contingent upon such things happening or not

    happening Hence the liability is notrecognised as such

    5/27/2010 Free template from www.brainybetty.com 6

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    7/13

    Recognition

    rovision should be made with these THREE condit ions aresatisfied Entity has a present obligation as a result of past event

    Obligation is present - that is, more likely than not per a ns o or ar ses ou o a pas even , no ou o an even o appen n

    future It is probable that an outflow will take place to settle the obligation A reliable estimate can be made of the obligation

    Note the difference between liability and provision discussedearlier

    The degree of estimation required If the amount of li abili ty i s almost ascertainable and does not require

    significant estimation, we create a liabili ty If estimation required is significant, we make a provision If reliable estimate cannot be made, or other condit ions for provisioning are

    not satisfied, we create a contingent liability

    5/27/2010 Free template from www.brainybetty.com 7

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    8/13

    Evidence required for provisioning

    Provisions are based on an estimated liabilityfor events that have already happened, that is,

    obligating event The probability of incurrence of such

    Evidence may include evidence available after thebalance sheet date

    That is to say, provision may be created on thebalance sheet date

    , ,balance sheet date

    Though the evidence of such obligation arises after balancesheet date

    5/27/2010 Free template from www.brainybetty.com 8

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    9/13

    Obligating event Obligating events that exist on the balance

    sheet date only lead to provisions

    We cannot be looking at what expenditure will haveto be incurred in future: only to the extent of

    Second condition is the obligating eventpertains to things that have happened

    For example, penalty for infraction of a law that hashappened

    ,to identify the counterparty, that is therecipient

    5/27/2010 Free template from www.brainybetty.com 9

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    10/13

    Contingent liabilities and contingent

    assets Contingent liabilit ies are not recognised

    They are only disclosed When the liability satisfies the features to create

    a provision, or becomes a certain liability, it is

    recognised as such Contingent assets are neither recognised nor

    disclosed

    5/27/2010 Free template from www.brainybetty.com 10

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    11/13

    Estimation of liability to make

    rovision Estimation is done applying best estimate

    Gains from future disposal of assets are notcaptured in estimating the amount of thea ty

    Reimbursements from third parties are notncorpora e un ess s reasona y cer a n oreceipt

    A provision should be used only for the

    5/27/2010 Free template from www.brainybetty.com 11

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    12/13

    Restructuring provision Meaning of restructuring

    Sale or termination of a line of business

    Closure of business locations Management restructuring, e.g., Eliminating a layer

    Fundamental reorganisations having material impacton nature or focus of the enterprise

    If the entity announces restructuring,restructuring provision should be made if

    Not associated with the ongoing activities of the

    enterprise

    5/27/2010 Free template from www.brainybetty.com 12

  • 8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

    13/13

    START

    Present obligation Possibleas a result of an

    obligating event? obligation?

    o

    Y e

    Y e

    Possible Outflow? Remote?

    s

    No

    s

    Yes

    es

    R N

    Y e

    are

    o

    5/27/2010 Free template from www.brainybetty.com 13

    Do NothingProvideDisclose contingent

    Liabilities