AS 29 – Provisions, Contingent

Liabilities and Contingent Assets

Accounting Standard – AS 29
(revised 2016)

Provisions, Contingent Liabilities and

Contingent Assets
Objective
The objective of this Standard 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 Standard is also to lay down appropriate accounting for
contingent assets.
* The Standard was originally issued in 2003. The Standard has been revised by the Ministry of Corporate Affairs,
Government of India, vide Notification dated 30th March, 2016, which is relevant for companies following Companies
(Accounting Standards) Rules, 2006 and which should be used for preparation of accounts for accounting periods
commencing on or after the date of notification. The Standard has been revised for entities other than companies in
2016 by the Council of the ICAI and is mandatory for accounting periods commencing on or after April 1, 2017 (see
Announcement XLV). Consequent to this revision, paragraph 35 stands revised and transitional provisions added.
1. Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards are
intended to apply only to items which are material.

Scope
1. This Standard should be applied in accounting for provisions and
contingent liabilities and in dealing with contingent assets, except:
(a) those resulting from financial instruments2 that are carried at fair value;
(b) those resulting from executory contracts, except where the contract is
onerous;
Explanation:
(i) An ‘onerous contract’ is a contract in which the unavoidable costs of
meeting the obligations under the contract exceed the economic benefits
expected to be received under it. Thus, for a contract to qualify as an onerous
contract, the unavoidable costs of meeting the obligation under the contract
should exceed the economic benefits expected to be received under it. The
unavoidable costs under a contract reflect the least net cost of exiting from the
contract, which is the lower of the cost of fulfilling it and any compensation or
penalties arising from failure to fulfill it.
(ii) If an enterprise has a contract that is onerous, the present obligation under
the contract is recognised and measured as a provision as per this Standard.
The application of the above explanation is illustrated in Illustration+ 10 of
Illustration C attached to the Standard.
(c) those arising in insurance enterprises from contracts with policy-holders;
and
(d) those covered by another Accounting Standard.
2. This Standard 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 Standard does not apply to executory contracts
unless they are onerous.
4. This Standard 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 Standard
instead of this Standard. 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
Standard applies to such cases; and
(d) retirement benefits (see AS 15, Accounting for Retirement Benefits in the
Financial Statements of Employers).3
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 Standard does not address the recognition of revenue. AS 9,
Revenue Recognition, identifies the circumstances in which revenue is
recognized and provides practical guidance on the application of the
recognition criteria. This Standard does not change the requirements ofAS 9.
7. This Standard defines provisions as liabilities which can be measured 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 Standard.
8. Other Accounting Standards specify whether expenditures are treated as
assets or as expenses. These issues are not addressed in this Standard.
Accordingly, this Standard neither prohibits nor requires capitalization of the
costs recognized when a provision is made.
9. This Standard 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, Discontinuing
Operations.

Definitions
10. The following terms are used in this Standard with the meanings specified:
10.1 A provision is a liability which can be measured only by using a
substantial degree of estimation.
10.2 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.
10.3 An obligating event is an event that creates an obligation that results in
an enterprise having no realistic alternative to settling that obligation.
10.4 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 recognized
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.
10.5 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.
10.6 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.
10.7 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.
10.8 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 from normal business
practice, custom and 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 involved with 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 Standard, 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.

Recognition
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.
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, it may 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).
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 only liabilities recognised in an enterprise’s balance sheet are
those that exist at the balance sheet date.
18. It is only those obligations arising from past 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 its method 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 immediately may 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 damage will 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 it will be impossible to be virtually certain of
the enactment of a law until it is enacted.
Probable Outflow of Resources Embodying Economic Benefits
22. For a liability to qualify for recognition there must 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 Standard4 ,
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. product warranties
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 item may be small, it may well
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 the
other recognition criteria are met).
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).

Contingent Liabilities
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 for which an outflow of 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 outflow of future economic benefits will 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).

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 that may 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.

Measurement
Best Estimate
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
except in case of decommissioning, restoration and similar liabilities that are
recognised as cost of Property, Plant and Equipment. The discount rate (or
rates) should be a pre-tax rate (or rates) that reflect(s) current market
assessments of the time value of money and the risks specific to the liability.
The discount rate(s) should not reflect risks for which future cash flow
estimates have been adjusted. Periodic unwinding of discount should be
recognised in the statement of profit and loss.
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 from independent 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.

Risks and Uncertainties

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).

Future Events
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 life will 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 associated with
increased experience in applying existing technology or the expected cost of
applying existing technology to a larger or more 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.

Expected Disposal of 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 the Accounting Standard
dealing with the assets concerned.

Reimbursements
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 for which 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.
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 benefits will 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.

Application of the Recognition and Measurement Rules

Future Operating Losses
55. Provisions should not be recognised for future operating losses.
56. Future operating losses do not meet 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.
Restructuring
58. The following are examples of events that may 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 in management 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 its mind 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.

Disclosure
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.
Provided that a Small and Medium-sized Company and a Small and Medium-
sized Enterprise (Level II and Level III non-corperate entities), as defined in
Appendix 1 to this Compendium, may not comply with paragraph 66 above.
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.
Provided that a Small and Medium-sized Company and a Small and Medium-
sized Enterprise (Level II and Level III non-coperate entities), as defined in
Appendix 1 to this Compendium, may not comply with paragraph 67 above.
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 them to 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.
Transitional Provisions
73. All the existing provisions for decommissioning, restoration and similar
liabilities (see paragraph 35) should be discounted prospectively, with the
corresponding effect to the related item of property, plant and equipment.
Reference: https://cleartax.in/s/as-29-provisions-contingent-liabilities-assets