Ind AS 37 : Provisions, Contingent Liabilities and Contingent Assets
Overview of Ind AS 37
Recognition Measurement Reimbursements Change and use Application of Disclosure
of provisions the recognition
and measurement
rules
Provision Contingency Best estimate
Future
Provision
Present Contingent operating losses
Risk and
obligation liability
uncertainties
Onerous Contingent
Past event Contingent contracts liability
Asset Present value
Contingent
Probable outflow of Restructuring
asset
resources embodying Future events
economic benefits
Expected
Reliable estimate of the disposal of
obligation assets
To ensure that appropriate recognition criteria
and measurement bases are applied
Objective For provisions,
of Ind AS contingent liabilities and
37 contingent assets
To ensure that sufficient information is
disclosed in the notes to understand nature,
timing & amount
Financial Ind AS 115 'Revenue from Except lease that becomes
instruments Contracts with Customers' onerous before the
(including commencement date of the
guarantees) within lease as per Ind AS 116
the scope of Ind Ind AS 12 'Income Taxes'
AS 109
Except short-term leases and
Ind AS 116 'Leases' leases for which
the underlying asset is of low
Ind AS 37 value and that have become
Those covered by Ind AS 19 'Employee Benefits' onerous
does not another Ind AS
apply to
Notes:
Ind AS 104 'Insurance • Items such as depreciation,
Contracts' impairment of assets and doubtful
debts are adjustments to the carrying
Contingent Consideration amounts of assets and are not dealt
of an acquirer in a business with in this Standard.
combination (Ind AS 103) • Ind AS 37 neither prohibits nor
Executory requires capitalisation of the costs
Contracts* recognised when a provision is made.
• This Standard applies to provisions
Except those are onerous in for restructurings (including
nature discontinued operations).
*Executory Contracts
Either
Or
In which neither party Both parties have partially
has performed any of its performed their obligations
obligations to an equal extent
Provisions
It is a liability**
Either Or
Of uncertain timing Of uncertain amount
Settlement is expected
**Liability Present obligation Arising from past to result in outflow of
of the entity events resources embodying
economic benefits
No realistic alternative other than to settle that obligation
Either Or
A legal obligation* #
A constructive obligation
is derived from (any) is derived from entity’s actions by
Contract (explicit or Legislation Other operation of law
implicit terms)
- Established pattern of Entity has indicated Entity has created
past practice to other parties that a valid expectation
- Published policies it will accept certain that it will
- Sufficiently specific responsibilities discharge those
current statement responsibilities
Contingent Liability
An entity shall not recognise a
contingent liability
A possible obligation A present obligation
Arising from past events Arising from past events
Or Not recognised because
Its existence will be confirmed
only by the occurrence or
Either Or
non-occurrence of one or more
uncertain future events
Outflow of resources
The amount of the
embodying economic
obligation cannot be
benefits to settle the
measured with sufficient
obligation will probably be
Not wholly within the reliability
not required
control of the entity
Notes:
1. The term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.
2. Where it is not probable that a present obligation exists, an entity discloses a contingent liability. Probable means ‘more likely than not’.
3. If the possibility of an outflow of resources embodying economic benefits is remote, contingent liability is not disclosed.
4. Where an entity 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 entity 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.
5. Contingent liabilities are assessed continually to determine whether an outflow of resources embodying economic benefits has become
probable. If it becomes probable, a provision is recognised in the period in which the change in probability occurs.
Whose existence
will be confirmed Not wholly
Contingent A possible Arising from only by the within the
Asset asset past events occurrence or non- control of the
occurrence of one entity
or more uncertain
future events
An entity shall not recognize a contingent asset
Notes:
1. Contingent assets are not recognised in financial statements since it may never be realised.
2. When the realisation of income is virtually certain, then the related asset is recognised.
3. Contingent asset is disclosed where an inflow of economic benefits is probable.
4. Contingent assets are assessed continually. If it has become virtually certain, the asset and the related income are recognised in the
financial statements of the period in which the change occurs.
Differences between Provisions & Other Liabilities
S. No Provisions Other liabilities (Trade payables or accruals)
1 In provisions, there is uncertainty about the timing or amount • Trade payables are liabilities to pay for goods or services
of the future expenditure required in settlement that have been received or supplied and have been invoiced
or formally agreed with the supplier. Hence uncertainty is
generally much less than for provisions
• Accruals are similar to trade payables. However, it may also
include amounts due to employees
2 Provisions are reported separately Accruals are often reported as part of trade and other payables
Recognition of a Provision
No
Is there a present obligation (legal or constructive) for an entity?
Yes
No
Has the present obligation occurred as a result of past event?
Yes
A provision
No
Will there be probability for outflow of resources to settle the will not be
obligation? recognised
Yes
No
Can an entity make a reliable estimate of it?
Yes
Recognise a Provision
Notes:
1. If these conditions are not met, no provision should be recognised.
2. Where there are a number of similar obligations (eg 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.
3. Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer
probable, then the provision shall be reversed.
4. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is
recognised as borrowing cost.
Present Obligation
Generally, present obligation is clear when it arises. However,
when it is not clear then
A past event is deemed to give rise to a present obligation
If, taking account of all available evidence
It is more likely than not It is more likely
That a present obligation exists at the end of the That no present obligation exists at the end of the
reporting period reporting period
Recognize a provision (If the recognition criteria Disclose contingent liability (Unless the
are met) possibility of an outflow of resources embodying
economic benefits is remote)
Notes:
• No provision is recognised for costs that need to be incurred to operate in the future.
• Only those liabilities are recognised in an entity’s balance sheet which exist at the end of the reporting period.
Obligations arising from past events MEASUREMENT
Existing independently of an entity’s future actions
Best
Yes No Estimate
Recognize Provision Don’t recognize
(If the recognition Provision
criteria are met)
Expected Risk and
To the extent that Disposal of Measurement Uncertainity
Because the entity Assets
the entity is obliged can avoid the future
to rectify damage expenditure by its
already caused future actions
Examples:
- Penalties or clean-up costs for Future
Events Present
unlawful environmental damage Example:
Value
- Decommissioning costs of an oil - Fitting smoke
installation or a nuclear power filters in a certain
station type of factory
Best estimate in measurement of provision amount
Measurement of estimates of outcome & financial effect considers
Provision should be
the best estimate of
expenditure required Management’s judgement
to settle the present
obligation (At the end
of the reporting period)
Supplemented by:
- Experience of similar transactions - Reports from independent experts
If Provision involves items of large population (Ex. customer refunds, warranties, etc.)
Provision should be
measured before tax
Weight all possible outcomes by their associated probabilities (expected value)
In continuous range of possible outcomes
When each point in that range is as likely as any other
Then mid-point of the range is used
In case of measurement of single obligation
Individual most likely outcome may be the best estimate (Consider other possible
outcomes too)
If other possible outcomes are either mostly higher or mostly lower than the most
likely outcome
Higher or lower amount will be the best estimate
Risks and Uncertainties in measurement Present Value in measurement of provision amount
of provision amount
Whether the effect of the time value of money is material?
Risk is variability of outcome
Yes No
It should be considered in reaching the best
estimate of an amount of provision Consider present value Ignore present value
of expenditures expected
to settle the obligation as
provision amount
Risk adjustment = Expected excess amount to
be paid
The discount rate should be a pre-tax rate
Consider present value of outflows due to Discount rate should not reflect risks for which future
uncertainty cash flow estimates have been adjusted
Risk adjustment may increase the amount at The expected present value of outflows are calculated as
which a liability is measured follows:
• Each outcome is discounted to its present value
• The present value of outcomes are weighted by their
associated probabilities
Caution: Income or assets are not overstated
and expenses or liabilities are not understated
• Where discounting is used, the carrying amount of
a provision increases in each period to reflect the
passage of time.
Risk adjustment can be accounted for in • This increase is recognised as borrowing cost
number of ways as:
Future events in measurement of provision amount
Adding in: Adjusting: Adjusting:
Expected Estimates Discount
present of future rate
value of outflows
future
outflows Should be reflected where there is sufficient
objective evidence that they will occur
Disclosure of the uncertainties surrounding the Effect of possible new legislation is taken into
amount of the expenditure should be made consideration when sufficient objective evidence
exists that legislation is virtually certain to be
enacted
Evidence is required both of:
• what legislation will demand
• whether it is virtually certain to be enacted
and implemented in due course
Gains on the expected Recognise gains on expected
Expected disposal of assets disposal of assets disposals of assets at the time
in measurement of provision are not taken into specified by the Standard
amount account in measuring a dealing with the assets
provision concerned
Reimbursements
Situation The entity has no obligation for Where some or all of the expenditure required Where some or all of the
the part of the expenditure to be to settle a provision is expected to be reimbursed expenditure required to settle
reimbursed by the other party by another party and it is virtually certain that a provision is expected to be
reimbursement will be received if the entity reimbursed by another party
settles the provision but the reimbursement is NOT
virtually certain
Recognition The entity has no liability for the • The reimbursement is recognised as a separate The expected reimbursement is
amount to be reimbursed. Hence asset in the balance sheet not recognised as an asset
no provision will be made • In the statement of profit and loss, the expense
relating to a provision may be presented net of
the amount recognised for a reimbursement
• The amount recognised for the expected
reimbursement shall not exceed the liability
Disclosure No disclosure is required The reimbursement is disclosed together with The expected reimbursement is
the amount recognised for the reimbursement disclosed
Future operating losses Unavoidable costs
Economic
benefits
Onerous of meeting the expected to be
contract obligations under received under
the contract the contract
Provisions shall not be recognised for future
operating losses
Present obligation is to be recognised and measured
as a provision
As they do not meet the definition of a liability and
the general recognition criteria set out for provisions
Executory contracts that are not onerous fall outside
An expectation of future operating losses is an the scope of Ind AS 37
indication that certain assets of the operation may be
impaired
Make provision amount for the lower of
An entity tests these assets for impairment under
Ind AS 36, Impairment of Assets
Penalty /
Unavoidable costs of Compensation for not
fulfilling the contract meeting the obligations
from the contract
Recognize any impairment loss as per Ind AS 36
on assets dedicated to onerous contract before
making a separate provision for an onerous
contract
Restructuring
In general, restructuring is a plan of management to change the scope of business or manner of conducting
business
Examples of events that may fall under the definition of restructuring:
• sale or termination of a line of business;
• closure of business locations or relocation of business activities;
• changes in management structure; and
• fundamental reorganizations that have a material effect on the nature and focus of the entity’s operations
Provision for restructuring costs is recognized only when the general recognition criteria set out for provisions
are met
An obligation to restructure arises only if entity has
Raised valid expectation in those affected
Detailed formal plan for restructuring that it will carry out restructuring (through
implementation or announcement of main
features of restructuring)
Identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees who will be compensated for terminating
their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented.
No obligation arises for the sale of an operation until there is a binding sale agreement
When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for
impairment, under Ind AS 36
Restructuring provision includes only direct expenditures arising from the restructuring, which are both
Necessarily demanded by restructuring Not associated with the ongoing activities of entity
Restructuring provision does not include costs of:
• Retraining or relocating continuing staff;
• Marketing; or
• Investment in new systems and distribution networks.
Disclosure
For Provisions (Disclose for each class)*
Carrying amount at period’s beginning and end
Additional provisions made
Amounts incurred and charged against provision
Unused amounts reversed
Unwinding of discount due to time value
Comparative information is not required
For contingent liability Whether possibility of any outflow in
settlement is remote
No Yes No disclosures required
(Disclose for each class) (a) an estimate of its financial effect#
(b) an indication of the uncertainties
relating to the amount or timing of any
outflow
A brief description of the (c) possibility of any reimbursement
nature of contingent liability
Whether inflow of economic
For contingent Assets benefits is probable
Yes No No disclosure is required
A brief description of An estimate of their
the nature of contingent financial effect#
liability
* Disclose the following for each class of provision:
a) Nature of obligation and expected timing of any resulting outflows
b) Uncertainties about the amount or timing of those outflows
c) Any expected reimbursement
Provisions or contingent liabilities may be aggregated to form a class, but consider whether the nature of items is sufficiently
similar for a single statement
#
If required information is not disclosed since not practicable to do so, that fact shall be stated
