AS 29 guides how Indian entities record and report provisions, contingent liabilities, and contingent assets. The Standard helps users of financial statements understand the nature and timing of possible future cash outflows or inflows. It also promotes clarity and consistency.
Objective
AS 29 aims to ensure proper recognition and measurement of provisions and contingent liabilities. It also lays down when and how to disclose them. The Standard further explains how to deal with contingent assets, so users get a fair picture of possible future benefits.
Scope
AS 29 covers provisions, contingent liabilities and contingent assets, but with some limits. It does not apply to:
- Items from financial instruments measured at fair value.
- Executory contracts, unless the contract is onerous.
- Items arising from insurance contracts with policyholders.
- Items already covered by another Accounting Standard.
When another Standard applies, such as AS 7 or AS 22, that Standard takes priority.
Key Definitions
Clear concepts help apply AS 29 correctly. The most important ones include:
Provision
A provision is a liability that needs a fair amount of estimation. It arises from a past event and will lead to an outflow of resources.
Liability
A liability is a present obligation created by a past event. The settlement will likely require the use of economic resources.
Contingent Liability
A contingent liability may or may not lead to an outflow. It includes:
- A possible obligation confirmed only by future events, or
- A present obligation where an outflow is unlikely or cannot be estimated reliably.
Contingent Asset
A contingent asset is a possible asset. Future events, which the enterprise cannot control, will confirm whether it exists.
When to Recognise a Provision
AS 29 says a provision can be recognised only when all three conditions below are met:
- A past event has created a present obligation.
- An outflow of resources is likely.
- A reliable estimate of the amount is possible.
If any condition is missing, the enterprise should not recognise a provision. Instead, it may disclose a contingent liability, if required.
Measurement of Provisions
A provision should reflect the best estimate of the amount needed to settle the obligation at the reporting date.
While making this estimate, management may rely on past experience or expert opinion. The estimate should not overstate or understate the expected outflow.
Discounting is used only for specific items like decommissioning and restoration costs linked to property, plant and equipment.
If the enterprise expects another party to reimburse some part of the outflow, it can recognise the reimbursement only when receipt is virtually certain. This reimbursement is recorded as a separate asset.
Contingent Liabilities
An enterprise should not recognise contingent liabilities. Instead, it must disclose them unless the chance of outflow is remote.
If later events show that an outflow has become probable, the enterprise should recognise a provision in that period.
Contingent Assets
Enterprises should not recognise contingent assets because the inflow may never occur. However, when the inflow becomes virtually certain, the asset is no longer “contingent” and can be recognised.
If an inflow seems only probable (not virtually certain), the enterprise may include a brief note in the Board report.
Onerous Contracts
A contract becomes onerous when the unavoidable costs of meeting its terms exceed the expected benefits.
When this occurs, the enterprise should recognise a provision for the least net cost of fulfilling or exiting the contract.
Restructuring
Restructuring includes major changes such as:
- Shutting down or selling a business line,
- Closing or moving operations,
- Removing layers of management,
- Large-scale reorganisation.
A restructuring provision arises only when the enterprise creates a valid expectation among those affected by announcing and committing to a detailed plan. Only direct restructuring costs form part of the provision.
Disclosure Rules
AS 29 asks enterprises to disclose enough information for users to understand:
- The nature of the obligation,
- The expected timing of outflows,
- Key uncertainties, and
- Expected reimbursements.
For provisions, enterprises should show the opening balance, additions, usage, and reversals.
For contingent liabilities, enterprises should explain the nature and possible financial effect, unless such disclosure harms the enterprise’s position in a dispute.
Practical Examples
Warranty Claims
A manufacturer offers a two-year warranty. Past data shows that some units will need repairs. The sale creates the obligation and an outflow of resources is likely. The enterprise records a provision based on the best estimate of expected claims.
Litigation
If a court case is pending and the enterprise expects to lose based on legal advice, it needs to recognise a provision. But if the chances are unclear or loss seems unlikely, it should disclose a contingent liability instead.
Contingent Asset from a Claim
If the enterprise files a claim against a supplier and expects a favourable outcome but cannot be certain, it should not recognise the asset. It may disclose it if the inflow seems probable.
Why AS 29 Matters
AS 29 supports transparent and fair financial reporting. It strengthens user confidence and promotes better risk assessment. It also reduces the chance of hidden liabilities or sudden hits to profitability.
Enterprises that apply AS 29 correctly follow good governance practices and help ensure audit-ready financial statements.
Conclusion
AS 29 offers a clear framework for recognising, measuring and disclosing provisions, contingent liabilities and contingent assets. When applied well, it improves the quality of financial reporting and helps users understand both present obligations and future uncertainties.
For detailed/official copy:
AS 29 of ICAI (As on 01/04/2025): Provisions, Contingent Liabilities and Contingent Assets
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