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Ind AS 37 is a financial reporting standard that provides guidance on the recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets. It sets out the principles for determining when a provision should be recognized, how it should be measured, and what disclosures are required. Here is a detailed overview of Ind AS 37:
Scope and objectives:
Ind AS 37 applies to all entities that prepare financial statements in accordance with Ind AS. It provides guidance on the recognition and measurement of provisions, contingent liabilities, and contingent assets.
What are Provisions:
A provision is a liability of uncertain timing or amount that arises from a past event and is expected to be settled by an outflow of resources. Provisions should be recognized when there is a present obligation, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.
What are Contingent Liabilities:
A contingent liability is a possible obligation that arises from past events but is not yet certain. Contingent liabilities should be disclosed in the financial statements unless the possibility of an outflow of resources is remote.
What are Contingent Assets:
A contingent asset is a possible asset that arises from past events but is not yet certain. Contingent assets are not recognized in the financial statements but are disclosed if their existence is probable and their measurement can be reliably estimated.
Example for Contingent Liabilities and Assets:
Let’s say a company is involved in a legal dispute with a supplier over a breach of contract. The supplier claims damages of ₹100,000 for the alleged breach. The company believes it has a strong defense and believes the chances of an outflow of economic benefits are remote. However, if the court ruling is in favor of the supplier, the company may have an obligation to pay the damages.
In this scenario:
- The potential obligation to pay damages represents a contingent liability for the company.
- The potential right to recover damages from the supplier in case the court ruling is in favor of the company represents a contingent asset.
The company would disclose these contingent liabilities and contingent assets in the notes to the financial statements, providing details about the nature of the dispute, the potential amount involved, and the likelihood of any outflow or inflow of economic benefits.
Measurement of Provisions:
Provisions should be measured at the best estimate of the expenditure required to settle the obligation. The best estimate should consider all available information, including risks and uncertainties.
Provisions should be reviewed at the end of each reporting period and adjusted if necessary. Any changes in the provision should be recognized as an expense or as a reduction in the provision.
Measurement of contingent liabilities, and contingent assets:
The measurement of contingent assets and liabilities under Ind AS 37 involves assessing their probability of occurrence and estimating the amount of potential inflows or outflows of economic benefits.
Contingent assets are recognized when it is probable that the associated inflow of economic benefits will occur. On the other hand, contingent liabilities are recognized when it is probable that an outflow of economic resources will be required to settle the obligation. Here’s a breakdown of the measurement process:
Initial measurement:
Initially, contingent assets and liabilities are measured at the best estimate of the amount required to settle the obligation or the amount expected to be received. The best estimate represents the probability-weighted average of the possible outcomes.
Probability assessment:
The probability of occurrence is assessed based on available evidence, including historical data, expert opinions, and market conditions. The assessment ranges from remote (highly unlikely) to probable (more likely than not).
Continuous reassessment:
Contingent assets and liabilities are reassessed at the end of each reporting period. If there is a change in the probability of occurrence or the estimated amount, the measurement is adjusted accordingly.
Disclosures:
The financial statements should include disclosures related to provisions, contingent liabilities, and contingent assets. It’s important to note that the measurement of contingent assets and liabilities involves a degree of judgment and estimation, as they are inherently uncertain in nature. These disclosures should provide information about the nature, timing, and amount of the provisions, as well as the uncertainties surrounding them.
Ind AS 37 provides a framework for entities to recognize and account for provisions, contingent liabilities, and contingent assets in a transparent and reliable manner. By following the principles outlined in this standard, entities can ensure that their financial statements accurately reflect their obligations and potential risks.
FAQ:
How does Ind AS 37 define provisions?
Ind AS 37 defines provisions as liabilities of uncertain timing or amount, where the timing or amount is reliably estimable, and a present obligation exists as a result of a past event.
What are contingent liabilities and contingent assets under this Ind As?
Contingent liabilities are possible obligations that arise from past events and will be confirmed or settled by future events, while contingent assets are possible assets that arise from past events and will be confirmed by future events.
How does this standard determine the recognition and measurement of provisions?
Ind AS 37 requires provisions to be recognized when there is a present obligation, a reliable estimate can be made, and it is probable that an outflow of economic benefits will be required to settle the obligation.
What are some examples of contingent liabilities?
Examples of contingent liabilities include pending lawsuits, warranties, and guarantees, where the outcome is uncertain and will depend on future events.