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provisions, contingent liabilities and contingent assets
Objective

The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.

Scope
  • This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets, except:
  • those resulting from executory contracts, except where the contract is onerous; and
  • [Refer Appendix 1]
  • those covered by another Standard.
  1. This Standard does not apply to financial instruments (including guarantees) that are within the scope of Ind AS 109, Financial Instruments.
  2. 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. This Standard does not apply to executory contracts unless they are onerous.
  # This Ind AS was notified vide G.S.R. 111(E) dated 16th February, 2015 and was amended vide Notification No. G.S.R. 365(E) dated 30th March, 2016, G.S.R. 310(E) dated 28th March, 2018, G.S.R. 273(E) dated 30th March, 2019, G.S.R. 463(E) dated 24th July, 2020, G.S.R. 419(E) dated 18th June, 2021 and G.S.R. 255(E) dated 23rd March, 2022.  
  1.   [Refer Appendix 1]
  1. 1When another Standard deals with a specific type of provision, contingent liability or contingent asset, an entity applies that Standard instead of this Standard. For example, some types of provisions are addressed in Standards on:
    1. Omitted*;
    2. income taxes (see Ind AS 12, Income Taxes);
    3. 2leases (see Ind AS 116, Leases). However, this Standard applies to any lease that becomes onerous before the commencement date of the lease as defined in Ind AS 116. This Standard also applies to short-term leases and leases for which the underlying asset is of low value accounted for in accordance with paragraph 6 of Ind AS 116 and that have become onerous;
    4. employee benefits (see Ind AS 19, Employee Benefits);
    5. insurance contracts (see Ind AS 104, Insurance Contracts). However, this Standard applies to provisions, contingent liabilities and contingent assets of an insurer, other than those arising from its contractual obligations and rights under insurance contracts within the scope of Ind AS 104;
    6. contingent consideration of an acquirer in a business combination (see Ind AS 103, Business Combinations); and
    7. revenue from contracts with customers (see Ind AS 115, Revenue from Contracts with Customers). However, as Ind AS 115 contains no specific requirement to address contracts with customers that are, or have become, onerous, this Standard applies to such cases.
  2. 3Omitted
  1Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and, thereafter, substituted vide Notification No. G.S.R. 310(E) dated 28th March, 2018.
  • Refer Appendix 1
2 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019. 3Refer Appendix 1. Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and omitted vide Notification No. G.S.R. 310(E) dated 28th March, 2018.  
  1. This Standard defines provisions as liabilities of uncertain timing or amount. The term ‘provision’ is also used in the context of items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed in this Standard.
  2. Other Standards specify whether expenditures are treated as assets or as expenses. These issues are not addressed in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made.
This Standard applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation, additional disclosures may be required by Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.
Definitions
  • The following terms are used in this Standard with the meanings specified:
A provision is a liability of uncertain timing or amount.
A liability* is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from:
  • a contract (through its explicit or implicit terms);
  • legislation; or
  • other operation of law.
 
  • The definition of a liability in this Standard is not revised following the revision of the definition of a liability in the Conceptual Framework for Financial Reporting under Indian Accounting Standards issued in 2021 by the Institute of Chartered Accountants of India. [This footnote was inserted vide Notification No. G.S.R. 419(E) dated 18th June, 2021.]
  A constructive obligation is an obligation that derives from an entity’s actions where:
  • by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
  • as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
A contingent liability is:
  • a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
  • a present obligation that arises from past events but is not recognised because:
  • it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
  • the amount of the obligation cannot be measured with sufficient reliability.
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
A restructuring is a programme that is planned and controlled by management, and materially changes either:
  • the scope of a business undertaken by an entity; or
  • the manner in which that business is conducted.
 
Provisions and other liabilities
  1. Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
    1. trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
    2. accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.
Relationship between provisions and contingent liabilities
  1. In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this Standard the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.
  2. This Standard distinguishes between:
    1. provisions – which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and
    2. contingent liabilities – which are not recognised as liabilities because they are either:
 
  1. possible obligations, as it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources embodying economic benefits; or
  2. present obligations that do not meet the recognition criteria in this Standard (because either it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made).
Recognition
Provisions
  • A provision shall be recognised when:
  • an entity has a present obligation (legal or constructive) as a result of a past event;
  • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
  • a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognised. Present obligation
  • In rare cases, it is not clear whether there is a present obligation.
In these cases, 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 that a present obligation exists at the end of the reporting period.
  1. In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an entity determines whether a present obligation exists at the end of the reporting period by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes
  any additional evidence provided by events after the reporting period. On the basis of such evidence:
  1. where it is more likely than not that a present obligation exists at the end of the reporting period, the entity recognises a provision (if the recognition criteria are met); and
  2. where it is more likely that no present obligation exists at the end of the reporting period, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 86).
Past event
  1. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. This is the case only:
    1. where the settlement of the obligation can be enforced by law; or
    2. in the case of a constructive obligation, where the event (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation.
  2. Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s balance sheet are those that exist at the end of the reporting period.
  3. It is only those obligations arising from past events existing independently of an entity’s future actions (ie the future conduct of its business) that are recognised as provisions. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the entity. Similarly, an entity recognises a provision for the decommissioning costs of an oil installation or a nuclear power station to the extent that the entity is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal
  requirements, an entity may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory). Because the entity can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation for that future expenditure and no provision is recognised.
  1. An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed—indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will discharge its responsibilities.
  2. An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act (for example, a sufficiently specific public statement) by the entity gives rise to a constructive obligation. For example, when environmental damage is caused there may be no obligation to remedy the consequences. However, the causing of the damage will become an obligating event when a new law requires the existing damage to be rectified or when the entity publicly accepts responsibility for rectification in a way that creates a constructive obligation.
  3. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. For the purpose of this Standard, such an obligation is treated as a legal obligation. Differences in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted.
 
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