AS 29 by wG574Q4

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									             AS-29
Provisions, Contingent Liabilities
    and Contingent Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Content of the Presentation
Objective of the Standard
Applicability
Scope of the Standard
Definitions explained
Recognition criteria - Provisions
Observations/Other points - Provisions
Recognition criteria - Contingencies
Observations/Other points - Contingencies
Measurement of Provisions
Other Points
Disclosure requirement
Comparison with AS 4
Decision table - Summarized position
Comparison with IAS
Comparison with US GAAP
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Objective of the Standard
Ensuring that appropriate recognition criteria
  and       measurement               bases         are      applied      to
  provisions and contingent liabilities

Incorporation of sufficient information in financial
  statements to enable users to understand the
  nature, timing and amount of provisions and
  contingent liabilities

Laying          down         appropriate             accounting          for
  contingent assets                                              Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Applicability of the Standard
It comes into effect in respect of accounting
 periods commencing on or after 1st April 2004
Entire AS is applicable to (category a):
   Enterprises whose equity or debt securities are listed in
      India or outside India
   Enterprises which are in the process of listing
   Banks including co-operative banks
   Financial institutions
   Enterprises carrying on insurance business
   Enterprises whose turnover in immediately preceding
      financial year is more than Rs. 50 Crs
   Enterprises having borrowings in excess of rs. 10 crs at
      any time during the accounting period                      contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Applicability of the Standard (contd...)
Entire AS, except disclosure requirement of para
 67, is applicable to (category b):
   Enterprises whose turnover in immediately preceding
      financial year is more than Rs. 40 Lacs but is not more
      than Rs. 50 Crs
   Enterprises having borrowings in excess of Rs. 1 Cr. But
      not in excess of Rs. 10 Crs at any time during the
      accounting period
   Holding and subsidiary enterprises of any one of the
      above at any time during the accounting period
Entire AS, except disclosure requirement of para
 66 & 67, is applicable to all other enterprises
 (category c)
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Other Points Regarding Applicability
Enterprise once covered in category a and
  subsequently ceases to be so covered will not
  get exemption from para 67 until the enterprise
  ceases to be covered in category a for two
  consecutive years
Enterprise once covered in category a or b and
  subsequently ceases to be so covered will not
  get exemption from paras 66 & 67 until the
  enterprise ceases to be covered in category a
  and b for two consecutive years                                contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Other Points Regarding Applicability (contd…)
Enterprise once covered in category c and
  subsequently ceases to be so covered in the
  current accounting period, this standard applies
  in its entirety (if it subsequently falls in category
  a) or in its entirety except para 67 (if it
  subsequently falls in category b), as the case
  may be, from the current accounting period.
  However, the relevant corresponding previous
  period figures need not be disclosed
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Other Points Regarding Applicability (contd…)
If pursuant to the above provisions an enterprise
  does not disclose information required by para
  67 or paras 66 and 67, it should disclose such
  fact
From the date of applicability of this Standard all
  paras       of     AS     4    Contingencies              and   Events
  Occurring After the Balance Sheet Date that
  deal with contingencies (paras 1(a), 2, 3.1, 4 (4.1
  to 4.4), 5 (5.1 to 5.6), 6, 7, 9.1(relevant portion),
  9.2, 10, 11, 12 and 16) shall stand withdrawn                     Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Scope of the Standard
Standard should be applied in accounting for
   provisions and contingent liabilities and in
   dealing with contingent assets
Statement             does        not     apply         to      provisions,
   contingent liabilities and contingent assets:
    Resulting from financial instruments that are carried at
      fair value
    Resulting from executory contracts
    Arising in insurance enterprises from contracts with
      policy holders and
    Covered by another accounting standard                           contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Scope of the Standard (contd…)
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
Examples of provisions dealt with by another
   standard are:
    AS 7 construction contracts
    AS 22 accounting for taxes on income
    AS 19 leases
    AS 15 accounting for retirement benefits in the
      financial statements of employers                              contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Scope of the Standard (contd…)
This statement does not address recognition of

  revenue           i.e.     it     does        not       change      the

  requirements of AS 9 revenue recognition

The term provision (as used in this standard)

  does not include depreciation, impairment loss

  and doubtful debts
                                                                 Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Definitions explained
A Provision is:

    A liability

    Which        can     be     measured only            by     using a

      substantial degree of estimation

A Liability is:

    Present obligation arising from past events

    Settlement of which is expected to result in outflow

      of resources embodying economic benefits
                                                                     contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained (contd…)
An Obligating Event is:

    An event that creates an obligation

    That results in an enterprise having no realistic

      alternative to settling that obligation

A Possible Obligation is an obligation the

   existence of which (based on the evidence

   available) at the balance sheet date is

   considered not probable.
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained (contd…)
A Present Obligation is                        an      obligation      the
  existence of which (based on the evidence
  available)          at     the     balance           sheet     date    is
  considered probable i.e. more likely than not

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                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained (contd…)
A Contingent Liability is:
   A possible obligation
        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
   A present obligation that arises from past events but is
      not recognised because:
        It is nor probable that an outflow of economic resources
         will be required to settle the obligation or
        A reliable estimate of the amount of the obligation
         cannot be made                                          contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Definitions explained (contd…)

A Restructuring Programme is a programme:

    that is planned and controlled by management

       and

    that materially changes either:

         the scope of a business undertaken by an

          enterprise

         the manner in which that business is conducted
                                                                 Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Recognition criteria - Provisions
Para 14 of AS states that a Provision should be

  recognised when:

   an enterprise has a present obligation as a result

      of a past event

   it is probable that an outflow of economic

      resources embodying economic benefits will be
      required to settle the obligation and

   a reliable estimate can be made of the amount of

      the obligation                                             Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions
On the basis of evidence available on the
  balance sheet date and after considering
  additional          evidence            provided           by   events
  occurring after the balance sheet date:
   where it is more likely than not that a present
     obligation exists at the balance sheet date, the
     enterprise recognises a provision if:
        the settlement of obligation will result in outflow of
         economic resources and
        a reliable estimate of the amount can be made
                                                                    contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions (contd…)
     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 economic resources
       is remote

Only present obligations arising out of past
   events should be considered
No provision should be recognised for costs
   that need to be incurred to operate in future
                                                                          contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions (contd…)
An obligations always involves another party

    to whom obligation is owed. It is not necessary,
    however, to know the identity of the party to
    whom the obligation is owed

An outflow of economic resources or other

    event is regarded as probable if the probability
    that the event will occur is greater than the
    probability that it will not
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions (contd…)
Except in extremely rare cases, an enterprise

   will be able to determine a range of possible

   outcomes           and       can       therefore         make   can

   reliable estimate of the amount of provision

In extremely rare cases where it is not possible

   to make a reliable estimate, no provision is

   recognised and the liability is disclosed as

   contingent liability                                            Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Recognition criteria - Contingencies
As per para 26 of AS an enterprise should not


   recognise a contingent liability


As per para 30 of AS an enterprise should not


   recognise a contingent asset


                                                                 Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Observations                     /        other             points         -
Contingencies
Where an enterprise is jointly and severally

  liable for an obligation:

   provision (if the recognition criteria is met) should

      be made of the part of the obligation which has
      to be met by the enterprise

   the part of the obligation that is expected to be

      met by other parties is treated as contingent
      liability
                                                                     contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Observations/other points - Contingencies (contd…)

Contingent             Liabilities       should         be      assessed

  continually to determine whether outflow of

  economic resources has become probable or

  not

The moment the outflow of economic resource

  becomes             probable           provision          should     be

  recognised if other recognition criteria is met
                                                                     contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Observations/other points - Contingencies (contd…)
When the realisation of income is virtually
   certain,       then       the     related          asset      is   not      a
   contingent           asset        and        its    recognition             is
   appropriate
A contingent asset is not disclosed in the
   financial statements
Contingent assets are assessed continually and
   the moment the inflow of economic resource
   becomes virtually certain, the asset and related
   income should be recognised                                        Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Measurement of Provisions
Best Estimate:
   The amount recognised as a provision should be
      the best estimate of the expenditure
   It should not be discounted to its present value

   It should be based on evidence available not
      only on the balance sheet date but also from the
      events occurring after the balance sheet date
   The provision is measured before tax - tax
      consequences should be dealt in accordance
      with AS 22 Accounting for Taxes on Income
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Measurement of Provisions (contd…)
Risks and Uncertainties:

    Risks and uncertainties that surround events

       and circumstances should be taken into

       account in reaching the best estimate

    Uncertainty does not justify the creation of

       excessive           provisions         or      a      deliberate

       overstatement of liabilities

                                                                    contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Measurement of Provisions (contd…)
Future Events:

    Future events affecting the amount required to
       settle an obligation should be reflected in the
       amount of a provision if and only if there is
       sufficient objective evidence that they will occur

Expected Disposal of Assets:

    Gains from the expected disposal of assets
       should not be taken into account in measuring a
       provision
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Measurement of Provisions (contd…)
Reimbursements:
     When the expenditure required to settle a
       provision is expected to reimbursed by another
       party, the reimbursement should be recognised
     It should be recognised only if it is virtually
       certain that reimbursement will be received
     Reimbursement should be treated as a separate
       asset
     The       amount        of    reimbursement                should    not
       exceed the amount of provision
                                                                          contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Measurement of Provisions (contd…)
Changes in and Use of Provisions:

    Provisions should be reviewed at each balance

      sheet date and adjusted to reflect the current
      best estimate

    If after review it is identified that it does not meet

      the recognition criteria it should be reversed

    Provision should be used only for expenditure

      for which the provision was originally recognised
                                                                 Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Other points
Future Operating Losses:

    Provisions should not be recognised for future

      operating losses

    Future        operating         losses      do     not      meet    the
      definition of liability

    Expectation of future operating losses is an

      indication that certain assets may be impaired
      and thus, these assets should be tested under AS
      28 Impairment of Assets
                                                                        contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Other points (contd…)
Restructuring:
   Provision for restructuring costs is recognised
      only when the recognition criteria for provisions
      are met
   A restructuring provision should include only the
      direct expenditure arising from the restructuring
      and which are:
         necessarily entailed by the restructuring and

         not associated with the ongoing activities of the
          enterprise
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Other points (contd…)
Restructuring (contd…) :

    Examples of restructuring are:

         sale or termination of a line of business

         the closure of business locations in a country or

          region

         relocation of business activities

         changes in management structure

         fundamental re-organisations that have a material

          effect on the operations
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Other points (contd…)
Restructuring (contd…) :

    Restructuring provision does not include such

      costs as:

         retraining or relocating continuing staff

         marketing or

         investment        in    new     systems       and      distribution

          networks
                                                                      Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Disclosure
For each class of provision, the following

   should be disclosed (para 66 of the AS) :

    carrying amount at beginning and end of the

      period

    additional provisions made in the period

    amount used during the period

    unused amounts reversed during the period

                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure (contd…)
For each class of provision, the following should
  be disclosed (para 67 of the AS) :
   brief description of the nature of the obligation
      and expected timing of any resulting outflow of
      economic resources
   an indication of the uncertainties about those
      outflows and major assumptions concerning future
      events
   the amount of expected reimbursement, stating
      the amount recognised as an asset for expected
      reimbursement
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure (contd…)
Unless the possibility of outflow of economic
  resources           is    remote,         for     each         class      of
  contingent liability, the following should be
  disclosed (para 68 of the AS) :
   brief description of the nature of contingent
      liability
   an estimate of financial effect

   an indication of the uncertainties relating to any
      outflow
   the possibility of any reimbursement                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure (contd…)
Where any of the information required by para
  68 is not disclosed because it is not practicable
  to do so, that fact should be stated

If the disclosure of information are required in
  the Standard, is 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, enterprise need
  not disclose the information
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Disclosure (contd…)
If as per above, the enterprise does not

   disclose the information, it is required to

   disclose

    the general nature of the dispute

    reason why the information has not been

       disclosed

                                                                 Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies
and Events Occurring After the Balance
Sheet Date
            AS 29                    AS 4
 Definition of Contingent Contingent    Liability and
 Liability and Contingent Contingent Asset included in
 Asset separated          the       definition      of
                          ‘Contingency’

 The term ‘Provision’ clearly No express segregation of
 distinguished          from the term ‘Provision’ from the
 ‘Contingent Liability’ and term of ‘Contingent Liability’
 thus both the terms have
 been elaborated


                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events
Occurring After the Balance Sheet Date (contd…)
            AS 29                                   AS 4
 Only if there is a present            If   it   is  probable    that
 obligation and there will             contingency will result in a
 be outflow of economic                loss (an asset impaired or
 resources (to settle it)              liability incurred), provision
 which can be reliably                 should be made
 estimated,        provision
 should be made

 Provision   once       made No such      express
 should be reviewed at requirement mentioned
 each Balance Sheet date
 to see whether it sill meets
 the recognition criteria

                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events
Occurring After the Balance Sheet Date (contd…)
             AS 29                      AS 4
 Measurement of amount No            such       detailed
 of provision should be:      measurement principles laid
  Based on best estimate down
  After considering risks
   and uncertainties
  After considering future
   events
  Made               without
   considering      expected
   disposal of assets
  After taking into account
   reimbursements
                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events
Occurring After the Balance Sheet Date (contd…)
              AS 29                           AS 4
  Provision can be made for No such specific activity
  Restructuring activities if it included in the Standard
  meets     the   recognition
  criteria

  Provision should be used No       such     express
  only for expenditure for requirement mentioned in
  which the provision was the Standard
  originally recognised
  Detailed        disclosure No disclosure requirement
  requirement     for    the for contingent liability for
  Provisions made            which provision is made

                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events
Occurring After the Balance Sheet Date (contd…)
            AS 29                        AS 4
 If   the    disclosure  of No such concession given
 information            will by the Standard
 prejudicially affect the
 interest of the enterprise
 (in a dispute with third
 party) the same may not
 be disclosed. However,
 general nature of dispute
 and the reason for non-
 disclosure     should  be
 mentioned

                                                                 Return
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Decision Table - Position Summarized
       Situation 1                 Situation 2                 Situation 3
There is a present           There is a possible       There is a possible
obligation           that    obligation     or  a      obligation or a
probably requires an         present obligation        present obligation
outflow of resources         that      may,    but     where              the
and       a     reliable     probably will not,        likelihood of an
estimate      can     be     require an outflow        outflow              of
made of the amount           of resources.             resources            is
of obligation.                                         remote.
        Action 1                    Action 2                  Action 3
A      provision    is No    provision    is           No   provision is
recognised (para 14). recognised     (para             recognised (para
                       26).                            26).
Disclosures       are
                       Disclosures     are             No disclosure is
required     for  the
provision (paras 66 required for the                   required (para 68).
and 67)                contingent liability
                                                                      Return
                       (para 68).
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison      with                                   International
Accounting Standard
           IAS 37                     AS 29
                Discounting of Provisions
  Where the effect of The amount of provision
  time value of money is should not be discounted
  material the amount of to its present value
  provision should be
  discounted
                    Contingent Assets
  Where the inflow of Contingent Assets are
  economic benefits is usually disclosed in the
  probable, contingent report         of     approving
  assets     should     be authority. No requirement
  disclosed      in    the of disclosing it in financial
  financial statements     statements               contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison      with                International            Accounting
Standard (contd…)
               IAS 37                                  AS 29
                 Onerous Contracts
 Present obligation under No such requirement
 an Onerous Contract incorporated in AS 29
 should be recognised as
 provision.       Onerous
 Contract is a contract in
 which the unavoidable
 costs of meeting the
 obligations exceed the
 economic         benefits
 expected to be received
 under it
                                                                   contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison      with                International            Accounting
Standard (contd…)
           IAS 37                      AS 29
                Constructive Obligation
IAS        deals        with Requirement            of
‘constructive obligation’ in recognising constructive
the context of creation of obligation     has   been
provision. For example, in omitted by AS 29.
case of a restructuring, a
constructive      obligation
arises when an enterprise
has a detailed formal plan
for restructuring. Thus, in
this case provision is
recognised at an early
                                               Return
stage
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with US GAAP - FASB
Statement No. 5 - Accounting for
Contingencies
       US GAAP                                AS 29
If   the    estimated             No        such        express
amount of loss is                 requirement. However, all
within    a     range,            risks   and      uncertainties
provision should be               should be considered in
based      on     best            reaching     best   estimate.
estimate.    If   best            Uncertainty does not justify
estimate cannot be                creation of higher amount of
made,        minimum              provision. Thus, in case of
amount should be                  uncertainty lower amount
provided     with   a             should be provided with no
disclosure          of            disclosure of higher amount
maximum amount.                                                  contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with US GAAP - FASB Statement No. 5 -
Accounting for Contingencies (contd…)

         US GAAP                               AS 29
No provision should be             No provision can be made for
made       for    general          general          /unspecified
/unspecified                       contingencies. Disclosure of
contingencies such as              such contingencies is also not
seIf-insurance        etc.         encouraged.
However,         footnote
disclosure         and/or
appropriation of retained
earnings can be made
for such contingencies.



                                                                 contd...
AS 29 Provisions, Contingent Liabilities and Contingent Assets

Comparison with US GAAP - FASB Statement No. 5 -
Accounting for Contingencies (contd…)
         US GAAP                  AS 29
Unasserted claims exist No    such        requirement
when the claimant has incorporated in the Standard
elected not to assert the
claim or because the
claimant lacks knowledge
of existence of claim. If it
is probable that outcome
of such claims (if made)
will be unfavourable, the
unasserted claim should
be    disclosed   in   the
financial statements
                                                                 Return
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