AS-29: PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS ‘Provision isa lability which can be measured only by using a substantial degree of estimation. | A provision shouldbe recognigd whe ; ‘Sn enterprise has’ 4 ret ofpastevent 758" 3 itis probable har at tmbodying economic benefits will be required to > And sn be made of the amount of obligation, If these conditions fet, no provision should be recognized. (wana a ] ree TA can nda rvion sald We wi en i ape STO | of provisions | scttle the present obligation at the balance sheet date. — ae — “ Judgement ofthe management of the enterprise. (¢ Enpesieite of eee teactone 4 Reports froin independent experts * Provision should not be recognized or ftw operating Fosse { Provision should be measured before tx $ Provision should notbe discounted ale. d not be discounted to its present. CEasgiaD discounting of ponte for drommson apd similar Tere er prone toutahereeed seek banner eda {4 It should be adjusted to reflect the current best estimate senses oe) *# Ifitis no longer probable ha Were WI Be oUtlow of resources Lthat arises from past events and the existence of which will be = FOF The occurence or non oxcuTence of one or more uncertain future evens fot whol within te contol oft gateise > Aang) at vise pst events cause Fir noe Outflow of resouiee onomic benefits will be required to settle the obligation > A teliable estimate of the amount ofthe obligation cannot be made. “Hlements 1, [ Possible obligation x[x[x[x 2._[ Present obligation from past events Sy NA 3 [Expect onlow Vy NA 4, | Measurability (using substantial degree of estimation) |v v oy 5. | Whether itis Provision(P) or Contingent liability (CL) Recogaliion | Contingent liability should not be recognized Aey By & | aaa ee aah ALS. bar ‘The possibility of an outflow of resources embodying economic benefits is remote (i.e. no disclosure is even required in such case),Tis a possible asct that arises ffom past events the existence of which will be confirmed only by the pecusence os non-occurzencs of one oF more uncertain future events not wholly within ‘When some or all of the expenditure required to settle a provision is expected to be reimbursed. by another party (example through insurance contracts, indemnity clauses, supplier's warranty ‘etc.), reimbursement should be recognized when and only when itis virtually certain that re: mbursement will be received ifthe enterprise setles the obligation. “ Reimbursement recognized should not exceed the amount of the provision 4 In Balance Sheet, reimbursement should be presented as a separate asset. In the Statement of P&L, provision may be presented net of the amount recognized for reimbursement.‘RESTRUCTURING ‘A restructuring is a programme that is planned and contolled by management, and materially ‘Meaning changes either: () the scope of a business undertaken by an enterprise; or (©) the manner in which that business is conducted ‘Examples | ® — sale or termination ofa line of business; & _ the closure of business locations in a country or region or the relocation of business activities from one country or region to another; & changes in management structure, for example, eliminating a layer of management; and % fundamental re-organisations that have a material effect on the nature and focus of the enterprise's operations, Whether | >A provision for restructuring costs is recognised only when the recognition eriteria for provision provisions set out in Para 14 are met. ‘required? | >No obligation arises for the sale of an operation until the enterprise is committed to the sale, ice, there is a binding sale agreement, Tnclusions & [A restructuring provision should include only the direct expenditures arising from the Exclusions | restructuring which are those that are both: (a) necessarily entailed by the restructuring; and (b) not associated with the ongoing activities of the enterprise. ‘A restructuring provision does not include such costs as (a) retraining or relocating continuing staff; (©) marketing; or (c) investment in new systems and distribution networks.‘CONTRACT Tis a contract in which the unavoidable costs of mecting the obligations under the contract ‘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 ot penalties arising from failure to full it ‘An enterprise operates profitably fom a factory that it has leased under an operating Tease During December 2020 the enterprise relocates its operations to a new factory. The lease on the old factory continues for the next four years, it cannot be cancelled and the factory cannot bbe re-let to another user. ‘The obligating event occurs when the lease contract becomes binding on the enterprise, which ives rise to a legal obligation, tear i ceuoay . ‘When the lease becomes onerous, an outflow of resources embodying economic benefits is| probable Conclusion-A provision is recognised for the best estimate ofthe unavoidable lease payments.aber, 2020, a company finds that there are twenty law ‘suits outstanding which have not been settled til the date of approval of accounts By the Board of Directors. ‘The pOHANe Ome as estimalST BF the Board Bas TOIOWE Probability | Loss (®) +) x Tnespet of ive cases (Win) 100% ——4 : Next en cates (Win ee win Tae aee ors | 1.30.00 ae Loss (High damages) 10% | 2,00,000 lo Ge Remain ecu Win 30% : . 1 Cowra Sosa Ss Se Loss (High damages) 20% [2.10.00 Oona SIERRA he en (GAETONNS he SX + Gol Awovat Gar LY Vo cases + (0090 x3or) + @oo0vs * ww) X19 = Shope S case :[ (lors ASot) + Grose x20") x 5 = 8 600 Fadong goods company provides after: yor 2 yea fo tsewstomen, Based on pst experience, the company has heen following policy Tor making provision for warranties onthe invoice amount, Cressthar feat Pera fore than 1 year: 3% provision “The company Ras abe invoices asunder Invoice Date | Amount @) Tih Tanuary, 2078 | 40,000 29th January, 2019 | 25,000 ist Ocber 2019 | —o0 an ASS CCaleulate the provision to be made for warranty under Accounting Standard 29 as and Bist fst March, 2020) Also compute amount to be debited to Profitand Lo ie Dek Ansunt Warrenty — Tie 191g Hoasa - 14/1/20 fost vader Prost i Lenten Accepted ~ 0°66 crove! Grow Appet - ol lo un: G-tS4ut Ora: Ryo Naren feutade (ARzayOEE IPCC May 2016 (5 Marks) / ICALSM Ilustration 2 ‘AB Led. is in the process of finalizing ts account forthe year ende(Slst March, 2020 phe company secks ‘your advice onthe following: S)ERO adi inthe proven -f fnalting ie seewente foe sheyesended diet Marshr2020-The-eomsyany The Company's sales tax assessment TOFaSSSMEAt year 2017-18 has teen completed on lth February, 2020 with a demand of €2:T6 core. The company pak the ene duc under protest without prejudice to is sight of appeal. The Company files its appeal before the appellate authomty Wigrein The eeSsMeMTOEET Toa sum of the grounds of appeaTOVETlx on additions made i 2.10 crore. eee _ a 0 company hs nto int wag agen (Ty Ant te hour ine ao revision in wage from June 20]9, The agreement provides that the hike till May 2020 will not Be paid to the tuplojees ut el be Med ttm atthe time of erement. The otapany as TOTEPOOUTRE TCs ‘Government Bonds by Sept Se agp tee taco = Solution 4a) Since the company is not appealing against the addition of 80.66 crore the same should be provided for in its ‘accounts for the yea? ended on 3TH March-20-The amOU BANTUe test can be kept in the books as an aGvante MO isclsed along withthe contingent lablty of 2 OGRE ') The arrears fr the period from June, 2019 to March, 2020 are required tobe provided for inthe accounts of th company forthe yar ended on Stat Mache MET eming tat ngs OF ENT Ts Wags slteady sarte the year UTSID te beloe the balance sheet dae thooes the speemeTt was ened in May, 2020.Omen ‘During 2018.}9, A Lid. gives a guarantee of certain borrowings of B Ltd., whose financial condition at that time is sound. During 201920, the fnancal condition oF BL deeirats and af 30 September 7 Ld ering 2019-2 State wh sion is 7 (@)At31 March 2017 (b) At 31 March 2020 Rud. Posiben » Saved Gat tc a) ‘Present obligation asa result of a past obligating event - The obligating event is the giving of the guarantee, ‘which gives rse to an obligation, [Anoufo of esau Cafodving economic benefits in etement-No outlow of benefits is probable at 31 ‘March 2019. Conclusion - No provision is recognised. The guarantee is disclosed as a contingent liability unless the probability of any outflow is regarded as remote. Aes resent obligation as a result of a past obligating event - The obligating event isthe giving of the guarantee, ‘which gives rise toa legal obligation. LanemEen AtLoulflow of resources cmbodving economic benefits in settlement - At 31 March 2020, itis probable that an ‘outflow of resources embodying economic benefits will be requized to settle the obligation —————— ‘Goncasion - provision i recognise fo Cex estimate the obligationOnE ‘Under new legislation, an enterprise is required to fit smoke fers to its factories enterprise hasgot fitted the smoke fl State whether a - (@) At the balance sheet date of 31 March 2020 (b) At the balance sheet date of 31/March 2021 (@XAt31 March 2020 [I ax one Sano Se Fine ‘Present obligation asa result ofa pas obligaing event There is no obligation hecause there is no obligating Fret sine forthe const fitog se ters oor fins under Eee —— Conclusion - No provision is recognised for the cost OF fitting the smoke filters. ‘Prcsent obligation as a result ofa past obligating event “There is: lL no obiaton for the costs of fitting smoke Filters because no obligating even has occured (ihe iting ofthe ite). However, an obligatfon might ae event has occurred (the non-compliant EY Tis or penalties under the legislation because the oBligating ev Spano ieee - Assessment of probability of incurring fines and penalties by non-compliant operation Jepends on te detas of the legion and the agency of the enforcement regime. (Condusian No provision is recognised forthe cost of fting smoke filters. However a provision is ‘eeoghised forthe Bes eum O any Hes nd penal Wat ae wie ikely than BotTOBe posedPram ‘With reference to AS-29, how would you deal withthe following inthe annual accounts of the company at the Balance Sheet dates: ‘An onan Sperats an oot ld wheres ensngagsement requires ito remove theo gat the end of production and restore the seabed. Ninety percent of the eventual costs relate tothe removal st the cig and testing eed bang and ten prc ae ough th cara SE. At SERIES eet aon coed but ep aan ‘Solution ‘The construction of the oil rig creates an obligation under the terms of the license to remove the rig and restore thecabed and tna olgatiag crete ss Jato te say the chaps at le cs By ton fo An ofiow feu ening Seno Bact iin setteMENTS probable. Thus, a provision is recogni the eventual Coss that eet the emoral of ho ig tn eration of amg casey Daling Tae cae inde aff cos fh of How again amg vi ced xing a en gauged see eo, RE FOVEOT Tue rhe cx oTeseasion al a REE date ‘Ten per cent of costs that arise through the extraction of oil are recognized as a liability when the oil is extracted. 9 be! f a‘Sun Ltd, has entered into a sale contract of 85 crores with X Ltd. during 2019-20 Financial year. The profit on this transaction is @1 crore. The delivery of goods to take place during the first month of 2020-21 financial year. In case of fair of Sun Led. to deliver within the schedule, a compensation of € 1.5 crores is to be paid. 10 X Ld. Sun Ltd planned to manufacture Tie goods daring the i sho 100m yo Aon Taian sheet date 013.2020, the goods were noe manlasuted andi was unkey that San i wil bea a posts to meth conactn elation He eS Oo ae () Should Sun Ltd. for conting per AS 297 \ S — (i) Sou ovale be cared athe cst a compensation tepid over the rot? a“ ' pat {) ASE) "Peles, Comings Laisa Contig Ais roves ti ten i cain Present obligation, asa result of past events that probably requires an outflow of resources and a reliable inne Ue aade a ihe natn ofoblgation proves aioull Be esopeped Suri haste ‘obligation fo deliver the goods within the scheduled time as per the contract. Its probable that Sun Ltd, will fal to deliver the goods within thes ible to estimate the artount oT ‘compensation =O ‘Therefore, Sun Ltd, should provide for the contingency amounting 1.5 crores $s per AS 29. (i Provision should, as the excess of compensation to be paid over the profit. The goods were ‘not manufactured before 31st March, 2020 and no profit had accrued Tor the Financial year 2019-2020, ‘Theta, provision should be made. pov hwPa PA ‘The company has not made provision for warrantee in respect of certain goods considering that the company can aim the waif cost Foor orginalsopplir. Hence tne acSOUstanT OTT COMPRA S15 a the company is SoF RAVI any Tabi ar wararece on a partcuar date as the amount gets rears You are required to comment on the accounting treatment done by the XYZ Ltd. inline with the provisions of AS 29. Comment ‘As per AS 29, where some or all ofthe expenditure required to sete a provision is expected tobe reimbursed by another party, the reimbursement should be recognised when, and only when, its vitally certain that reimbarsenfnt willbe received ithe enterprise sewer Ue OONgaton-The TnnbUrsemcn OU be cated as 4 separate asset. The amount recognised for the reimbursement should not exceed the amouat oT the provision {is apparent from the question thatthe company had not made provision for warranty in respect of certain goods considering Rat the company can claim the warranty cos from the original supplier. However, the provision for warranty should have asper AS 29 and the amount claimable as reimbuisement Should be eae aS Tage ase meta omen he company fare than omit tie disease oT soch abi ingly, it was viewed thatthe accounting treatment adopted agi sate) Soe cee by the company with respect to warr‘Mini Ltd. took a factory premises on lease on 1.4.2019 for €2,00,000 per month. The lease is operating lease Daring March, 2020, Mimi Lid. relocates its operation Toa ew Taco Dang. The ease on tHE! cory premises cOWTamaes to be live upto 31.12.2027 The Tease cannot Be cancelled and cannot be sub-let to another wer. The antisite Tas en olan 38 mon URE 2 2072 sould provide nthe accounts forthe year ending 313.2020, Mini Ltd. sccks your advice In accordance with AS 29 ‘Provisions, Contingent Liabilities and Contingent Asses if an enterprise has a contrat that is onczaus. the present obligation under th contract shouldbe recopnizedand measured as 8 provision, Inthe given cas, the operating lease contact has become aneigbr as the economic Bene of lease ‘ett Yr next 55 mont upg 91 12 S027 WIT RIE Howeter tise, Mini ads top ee eat, ore eres nat 33 moat Sect hier on aceoout cf S506 8 es beeen rumen the ye octiog ett ones