Issued in 2003.

Applicable WEF 01/04/04 Mandatory in entirety for Level I enterprises Applicable for SMCs with certain relaxations regarding disclosure. Specified Paragraphs of AS 4 on contingencies stand withdrawn except to the extent they deal with impairment of Financial assets and are not covered by AS 28.

 To ensure appropriate recognition criteria and measurement bases for provisions contingent liabilities Disclosure requirements to enable users to understand their nature, timing & amount.

Accounting for contingent assets

Provision for restructuring costs

Applicable to all Provisions, Contingent Liabilities and Contingent Assets other than:

Financial instruments carried at fair value

Insurance contracts with policy holders Those covered by other AS like AS 7 (Construction Contracts) AS 22 (Taxes on Income), etc. AS 19 (Leases). In case an Operating Lease has become Onerous, AS 29 would apply. AS -15 (Employee Benefits) Executory contracts [Contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent] [Onerous contracts (Cost >Benefit from contract) are covered by AS-29] Contract where the unavoidable costs of meeting the obligations under the contract exceed the expected economic benefits. Provision to be recognised [as per ASI-30]

A PROVISION is a liability which can be measured only by using a substantial degree of estimation. (Quantum not certain - differs with ACCRUAL to this extent) A LIABILITY is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of economic resources. PRESENT OBLIGATION - an obligation is a present obligation if, based on the evidence available, its existence at the B/S date is considered probable, i.e., more likely than not.

 Either Payment of cash transfer of other assets Provision for services Replacement with another obligation conversion to equity

waiver or forfeiture

AS 29 defines Provision as a liability which can be measured only by using a substantial degree of estimation.
RECOGNITION CRITERIA

PROVISION =

 Future events that may affect the amount required to settle an obligation should be considered in arriving at the amount of provision where there is sufficient objective evidence that such future events will occur. CHANGES IN TECHNOLOGY Development of completely new technology to be taken into account only where there is sufficient evidence that it will be available & effective for the required task. CHANGE IN LEGISLATION New legislation to be reflected in the measurement of a provision for an existing obligation when there is sufficient objective evidence that the legislation is virtually certain to be enacted.

 A provision should be used only for expenditures for which the provision was originally recognised. 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.

 RESTRUCTURING is a programme that is planned & controlled by management, and materially changes either: the scope of a business undertaken by an enterprise; or the manner in which that business is conducted. RESTRUCTURING No obligation arises for the sale of an operation until there is a binding sale agreement Recognise a provision for re-structuring cost only if the recognition criteria as stipulated in the beginning is met

a)A possible obligation that arises from past event and existence of which will be confirmed only by 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: It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation A reliable estimate of the amount of the obligation cannot be made.

Contingent =

 An enterprise should not recognise a CL. A CL is disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. Where an enterprise is jointly & severally liable for an obligation, The part of obligation that is expected to be met by other parties is treated as a CL. The remainder, being the entity's share is to be recognised as a provision, except in the extremely rare circumstances where no reliable estimate can be made. Conduct a continuous review of CL. Characteristics of an item that was originally reckoned as a CL may change over time. In turn, this may lead to recognition of a provision, in line with recognition criteria.

A possible asset arises from past events and existence of which is dependent upon a contingent event.

Contingent Asset =

 An enterprise should not recognise a CA. CA are not disclosed in the financial statements. It may be disclosed in the report of the approving authority.

CAs usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits.
When the realisation of income is virtually certain, then the related asset is not a CA & its recognition is appropriate. CAs are assessed continually & if it has become virtually certain that an inflow of economic benefits will arise, the asset & the related income are recognised in F/Ss of the period in which the change occurs.

Unless the possibility of any outflow is remote, For each class of contingent liability, following should be disclosed Brief description of the nature a where practicable Estimate of its financial affect Indications of uncertainties involved Possibility of reimbursements Any information not practicable such fact Exemption from Disclosures in extremely rare cases. However general nature of dispute, fact that and reason for non disclosure to be given.