Exposure Draft
Accounting Standard (AS) 37
Provisions, Contingent Liabilities and
Contingent Assets
Last date for the comments: January 28, 2019
Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India
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Exposure Draft
Accounting Standard (AS) 37
Provisions, Contingent Liabilities and Contingent Assets
The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate Affairs
in February, 2015, have been applicable to the specified class of companies. Accounting
Standards are applicable to entities to whom Ind AS are not applicable. However, the
Ministry of Corporate Affairs has requested the Accounting Standards Board of the Institute
of Chartered Accountants of India (ICAI) to upgrade Accounting Standards, as notified under
Companies (Accounting Standards) Rules, 2006, to bring them nearer to Indian Accounting
Standards. Accordingly, the Accounting Standards Board (ASB) of ICAI has initiated the
process of upgradation of these standards which will be applicable to all companies having
net-worth less than Rs. 250 crores including non-corporate entities.
In this direction, the ASB has finalised AS 37, Provisions, Contingent Liabilities and
Contingent Assets. For formulating AS 37, Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets, has been taken as the base. Major differences between draft AS 37 and
Ind AS 37 are given in Appendix 1 of the AS 37. Major differences between draft AS 37 and
AS 29 are given in Appendix 2 of the AS 37.
Following is the Exposure Draft of the Accounting Standard (AS) 37, Provisions, Contingent
Liabilities and Contingent Assets, issued by the Accounting Standards Board of the Institute
of Chartered Accountants of India, for comments. AS 37 refers to following ASs which are
under formulation:
1. AS 11, Construction Contracts
2. AS 12, Income Taxes
3. AS 17, Leases
4. AS 18, Revenue
5. AS 103, Business Combinations
6. AS 105, Non-current Assets Held for Sale and Discontinued Operations
The Board invites comments on any aspect of this Exposure Draft. Comments are most
helpful if they indicate the specific paragraph or group of paragraphs to which they relate,
contain a clear rationale and, where applicable, provide a suggestion for alternative wording.
How to Comment:
Comments can be submitted using one of the following methods so as to receive not later
than January 28, 2019:
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1. Electronically: Visit the link http://www.icai.org/comments/asb/
2. Email: Comments can be sent at commentsasb@icai.in
3. Postal: Secretary, Accounting Standards Board,
The Institute of Chartered Accountants of India, ICAI Bhawan,
Post Box No. 7100, Indraprastha Marg, New Delhi 110 002
Further clarifications on any aspect of this Exposure Draft may be sought by email to
asb@icai.in.
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(This Accounting Standard includes paragraphs set in bold type and plain type, which have
equal authority. Paragraphs in bold type indicate the main principles).
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
1 This Standard shall be applied by all entities in accounting for provisions,
contingent liabilities and contingent assets, except:
(a) those resulting from executory contracts, except where the contract is
onerous; and
(b) [Refer Appendix 1]
(c) those covered by another Standard
(d) those arising in insurance entities from contracts with policy-holders.
2 [Refer Appendix 1]
3 [Refer Appendix 1].
4. [Refer Appendix 1]
5 When 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:
(a) construction contracts (see AS 11, Construction Contracts);
(b) income taxes (see AS 12, Income Taxes);
(c) leases (see AS 17, Leases). However, as AS 17 contains no specific requirements
to deal with operating leases that have become onerous, this Standard applies to
such cases;
(d) employee benefits (see AS 19, Employee Benefits);
(e) [Refer Appendix 1]
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(f) contingent consideration of an acquirer in a business combination (see AS 103,
Business Combinations);
(g) [Refer Appendix 1]
(h) Financial instruments that are within the scope of AS 109, Financial Instruments.
6 Some amounts treated as provisions may relate to the recognition of revenue, for
example where an entity gives guarantees in exchange for a fee. This standard does
not address the recognition of revenue. AS 18, Revenue, identifies the circumstances
in which revenue is recognised. This standard does not change the requirements of
AS 18.
7 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.
8 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.
9 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 AS 105, Non-current Assets Held for Sale
and Discontinued Operations.
Definitions
10 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) a contract (through its explicit or implicit terms);
(b) legislation; or
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(c) other operation of law.
A constructive obligation is an obligation that derives from an entity's actions
here:
(a) 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
(b) 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) 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
(b) a present obligation that arises from past events but is not recognised
because:
(i) it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
(ii) 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.
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.
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:
(a) the scope of a business undertaken by an entity; or
(b) the manner in which that business is conducted.
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Provisions and other liabilities
11 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:
(a) 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
(b) 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
12 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
13 This Standard distinguishes between:
(a) 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
(b) contingent liabilities which are not recognised as liabilities because they are
either:
(i) 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
(ii) 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,
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or a sufficiently reliable estimate of the amount of the obligation cannot
be made).
Recognition
Provisions
14 A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past
event;
(b) it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; and
(c) 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
15 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.
16 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:
(a) 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
(b) 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).
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Past event
17 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:
(a) where the settlement of the obligation can be enforced by law; or
(b) 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.
18 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.
19 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.
20 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.
21 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
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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.
22 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.
Probable outflow of resources embodying economic benefits
23 For a liability to qualify for recognition there must be not only a present obligation
but also the probability of an outflow of resources embodying economic benefits to
settle that obligation. For the purpose of this Standard1, an outflow of resources or
other event is regarded as probable if the event is more likely than not to occur, ie the
probability that the event will occur is greater than the probability that it will not.
Where it is not probable that a present obligation exists, an entity discloses a
contingent liability, unless the possibility of an outflow of resources embodying
economic benefits is remote (see paragraph 86).
24 Where there are a number of similar obligations (eg product warranties or similar
contracts) the probability that an outflow will be required in settlement is determined
by considering the class of obligations as a whole. Although the likelihood of outflow
for any one item may be small, it may well be probable that some outflow of
resources will be needed to settle the class of obligations as a whole. If that is the
case, a provision is recognised (if the other recognition criteria are met).
Reliable estimate of the obligation
25 The use of estimates is an essential part of the preparation of financial statements and
does not undermine their reliability. This is especially true in the case of provisions,
which by their nature are more uncertain than most other items in the balance sheet.
Except in extremely rare cases, an entity will be able to determine a range of possible
outcomes and can therefore make an estimate of the obligation that is sufficiently
reliable to use in recognising a provision.
26 In the extremely rare case where no reliable estimate can be made, a liability exists
that cannot be recognised. That liability is disclosed as a contingent liability (see
paragraph 86).
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The interpretation of `probable' in this Standard as `more likely than not' does not necessarily apply in other
Accounting Standards.
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Contingent liabilities
27 An entity shall not recognise a contingent liability.
28 A contingent liability is disclosed, as required by paragraph 86, unless the possibility
of an outflow of resources embodying economic benefits is remote.
29 Where an entity is jointly and severally liable for an obligation, the part of the
obligation that is expected to be met by other parties is treated as a contingent
liability. The entity recognises a provision for the part of the obligation for which an
outflow of resources embodying economic benefits is probable, except in the
extremely rare circumstances where no reliable estimate can be made.
30 Contingent liabilities may develop in a way not initially expected. Therefore, they are
assessed continually to determine whether an outflow of resources embodying
economic benefits has become probable. If it becomes probable that an outflow of
future economic benefits will be required for an item previously dealt with as a
contingent liability, a provision is recognised in the financial statements of the period
in which the change in probability occurs (except in the extremely rare circumstances
where no reliable estimate can be made).
Contingent assets
31 An entity shall not recognise a contingent asset.
32 Contingent assets usually arise from unplanned or other unexpected events that give
rise to the possibility of an inflow of economic benefits to the entity. An example is a
claim that an entity is pursuing through legal processes, where the outcome is
uncertain.
33 Contingent assets are not recognised in financial statements since this may result in
the recognition of income that may never be realised. However, when the realisation
of income is virtually certain, then the related asset is not a contingent asset and its
recognition is appropriate.
34 A contingent asset is not disclosed in the financial statements. It is usually disclosed
in the report of the approving authority (Board of Directors in the case of a company,
and, the corresponding approving authority in the case of any other entity), where an
inflow of economic benefits is probable.
35 Contingent assets are assessed continually and if it has become virtually certain that
an inflow of economic benefits will arise, the asset and the related income are
recognised in the financial statements of the period in which the change occurs.
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Measurement
Best estimate
36 The amount recognised as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the end of the reporting
period. The amount of provision shall not be discounted to its present value
except in case of decommissioning, restoration and similar liabilities that are
recognised as cost of Property, Plant and Equipment. The discount rate (or
rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments
of the time value of money and the risks specific to the liability. The discount
rate(s) shall not reflect risks for which future cash flow estimates have been
adjusted. Periodic unwinding of discount should be recognised in the statement
of profit and loss.
37 The best estimate of the expenditure required to settle the present obligation is the
amount that an entity would rationally pay to settle the obligation at the end of the
reporting period or to transfer it to a third party at that time. It will often be
impossible or prohibitively expensive to settle or transfer an obligation at the end of
the reporting period. However, the estimate of the amount that an entity would
rationally pay to settle or transfer the obligation gives the best estimate of the
expenditure required to settle the present obligation at the end of the reporting period.
38 The estimates of outcome and financial effect are determined by the judgement of the
management of the entity, supplemented by experience of similar transactions and, in
some cases, reports from independent experts. The evidence considered includes any
additional evidence provided by events after the reporting period.
39 [Refer Appendix 1]
40 [Refer Appendix 1]
41 The provision is measured before tax, as the tax consequences of the provision, and
changes in it, are dealt with under AS 12.
Risks and uncertainties
42 The risks and uncertainties that inevitably surround many events and
circumstances shall be taken into account in reaching the best estimate of a
provision.
43 Risk describes variability of outcome. A risk adjustment may increase the amount at
which a liability is measured. Caution is needed in making judgements under
conditions of uncertainty, so that income or assets are not overstated and expenses or
liabilities are not understated. However, uncertainty does not justify the creation of
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excessive provisions or a deliberate overstatement of liabilities. For example, if the
projected costs of a particularly adverse outcome are estimated on a prudent basis,
that outcome is not then deliberately treated as more probable than is realistically the
case. Care is needed to avoid duplicating adjustments for risk and uncertainty with
consequent overstatement of a provision.
44 Disclosure of the uncertainties surrounding the amount of the expenditure is made
under paragraph 85(b).
45-47 [Refer Appendix 1]
Future events
48 Future events that may affect the amount required to settle an obligation shall
be reflected in the amount of a provision where there is sufficient objective
evidence that they will occur.
49 Expected future events may be particularly important in measuring provisions. For
example, an entity may believe that the cost of cleaning up a site at the end of its life
will be reduced by future changes in technology. The amount recognised reflects a
reasonable expectation of technically qualified, objective observers, taking account of
all available evidence as to the technology that will be available at the time of the
clean-up. Thus it is appropriate to include, for example, expected cost reductions
associated with increased experience in applying existing technology or the expected
cost of applying existing technology to a larger or more complex clean-up operation
than has previously been carried out. However, an entity does not anticipate the
development of a completely new technology for cleaning up unless it is supported by
sufficient objective evidence.
50 The effect of possible new legislation is taken into consideration in measuring an
existing obligation when sufficient objective evidence exists that the legislation is
virtually certain to be enacted. The variety of circumstances that arise in practice
makes it impossible to specify a single event that will provide sufficient, objective
evidence in every case. Evidence is required both of what legislation will demand and
of whether it is virtually certain to be enacted and implemented in due course. In
many cases sufficient objective evidence will not exist until the new legislation is
enacted.
Expected disposal of assets
51 Gains from the expected disposal of assets shall not be taken into account in
measuring a provision.
52 Gains on the expected disposal of assets are not taken into account in measuring a
provision, even if the expected disposal is closely linked to the event giving rise to the
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provision. Instead, an entity recognises gains on expected disposals of assets at the
time specified by the Standard dealing with the assets concerned.
Reimbursements
53 Where some or all of the expenditure required to settle a provision is expected to
be reimbursed by another party, the reimbursement shall be recognised when,
and only when, it is virtually certain that reimbursement will be received if the
entity settles the obligation. The reimbursement shall be treated as a separate
asset. The amount recognised for the reimbursement shall not exceed the
amount of the provision.
54 In the statement of profit and loss, the expense relating to a provision may be
presented net of the amount recognised for a reimbursement.
55 Sometimes, an entity is able to look to another party to pay part or all of the
expenditure required to settle a provision (for example, through insurance contracts,
indemnity clauses or suppliers' warranties). The other party may either reimburse
amounts paid by the entity or pay the amounts directly.
56 In most cases the entity will remain liable for the whole of the amount in question so
that the entity would have to settle the full amount if the third party failed to pay for
any reason. In this situation, a provision is recognised for the full amount of the
liability, and a separate asset for the expected reimbursement is recognised when it is
virtually certain that reimbursement will be received if the entity settles the liability.
57 In some cases, the entity will not be liable for the costs in question if the third party
fails to pay. In such a case the entity has no liability for those costs and they are not
included in the provision.
58 As noted in paragraph 29, an obligation for which an entity is jointly and severally
liable is a contingent liability to the extent that it is expected that the obligation will
be settled by the other parties.
Changes in provisions
59 Provisions shall be reviewed at the end of each reporting period and adjusted to
reflect the current best estimate. If it is no longer probable that an outflow of
resources embodying economic benefits will be required to settle the obligation,
the provision shall be reversed.
60 [Refer Appendix 1]
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Use of provisions
61 A provision shall be used only for expenditures for which the provision was
originally recognised.
62 Only expenditures that relate to the original provision are set against it. Setting
expenditures against a provision that was originally recognised for another purpose
would conceal the impact of two different events.
Application of the recognition and measurement rules
Future operating losses
63 Provisions shall not be recognised for future operating losses.
64 Future operating losses do not meet the definition of a liability in paragraph 10 and
the general recognition criteria set out for provisions in paragraph 14.
65 An expectation of future operating losses is an indication that certain assets of the
operation may be impaired. An entity tests these assets for impairment under AS 36,
Impairment of Assets.
Onerous contracts
66 If an entity has a contract that is onerous, the present obligation under the
contract shall be recognised and measured as a provision.
67 [Refer Appendix 1]
68 This Standard defines an onerous contract as a contract in which the unavoidable
costs of meeting 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 or penalties arising from failure to fulfil it.
69 Before a separate provision for an onerous contract is established, an entity
recognises any impairment loss that has occurred on assets dedicated to that contract
(see AS 36).
Restructuring
70 The following are examples of events that may fall under the definition of
restructuring:
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(a) sale or termination of a line of business;
(b) the closure of business locations in a country or region or the relocation of
business activities from one country or region to another;
(c) changes in management structure, for example, eliminating a layer of
management; and
(d) fundamental reorganisations that have a material effect on the nature and focus of
the entity's operations.
71 A provision for restructuring costs is recognised only when the general recognition
criteria for provisions set out in paragraph 14 are met. Paragraphs 72 83 set out how
the general recognition criteria apply to restructurings.
72 A constructive obligation to restructure arises only when an entity:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees who
will be compensated for terminating their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented; and
(b) has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main
features to those affected by it.
73 Evidence that an entity has started to implement a restructuring plan would be
provided, for example, by dismantling plant or selling assets or by the public
announcement of the main features of the plan. A public announcement of a detailed
plan to restructure constitutes a constructive obligation to restructure only if it is
made in such a way and in sufficient detail (ie setting out the main features of the
plan) that it gives rise to valid expectations in other parties such as customers,
suppliers and employees (or their representatives) that the entity will carry out the
restructuring.
74 For a plan to be sufficient to give rise to a constructive obligation when
communicated to those affected by it, its implementation needs to be planned to begin
as soon as possible and to be completed in a timeframe that makes significant changes
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to the plan unlikely. If it is expected that there will be a long delay before the
restructuring begins or that the restructuring will take an unreasonably long time, it is
unlikely that the plan will raise a valid expectation on the part of others that the entity
is at present committed to restructuring, because the timeframe allows opportunities
for the entity to change its plans.
75 management or board decision to restructure taken before the end of the reporting
period does not give rise to a constructive obligation at the end of the reporting period
unless the entity has, before the end of the reporting period:
(a) started to implement the restructuring plan; or
(b) announced the main features of the restructuring plan to those affected by it in a
sufficiently specific manner to raise a valid expectation in them that the entity
will carry out the restructuring.
If an entity starts to implement a restructuring plan, or announces its main features to
those affected, only after the reporting period, disclosure is required under, AS 10,
Events after the Reporting Period, if the restructuring is material and non-disclosure
could influence the economic decisions that users make on the basis of the financial
statements.
76 Although a constructive obligation is not created solely by a management decision, an
obligation may result from other earlier events together with such a decision. For
example, negotiations with employee representatives for termination payments, or
with purchasers for the sale of an operation, may have been concluded subject only to
board approval. Once that approval has been obtained and communicated to the other
parties, the entity has a constructive obligation to restructure, if the conditions of
paragraph 72 are met.
77 [Refer Appendix 1].
78 No obligation arises for the sale of an operation until the entity is committed to
the sale, ie there is a binding sale agreement.
79 Even when an entity has taken a decision to sell an operation and announced that
decision publicly, it cannot be committed to the sale until a purchaser has been
identified and there is a binding sale agreement. Until there is a binding sale
agreement, the entity will be able to change its mind and indeed will have to take
another course of action if a purchaser cannot be found on acceptable terms. When
the sale of an operation is envisaged as part of a restructuring, the assets of the
operation are reviewed for impairment, under AS 36. When a sale is only part of a
restructuring, a constructive obligation can arise for the other parts of the
restructuring before a binding sale agreement exists.
80 A restructuring provision shall include only the direct expenditures arising from
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the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the entity.
81 A restructuring provision does not include such costs as:
(a) retraining or relocating continuing staff;
(b) marketing; or
(c) investment in new systems and distribution networks.
These expenditures relate to the future conduct of the business and are not liabilities
for restructuring at the end of the reporting period. Such expenditures are recognised
on the same basis as if they arose independently of a restructuring.
82 Identifiable future operating losses up to the date of a restructuring are not included in
a provision, unless they relate to an onerous contract as defined in paragraph 10.
83 As required by paragraph 51, gains on the expected disposal of assets are not taken
into account in measuring a restructuring provision, even if the sale of assets is
envisaged as part of the restructuring.
Disclosure
84 For each class of provision, an entity shall disclose:
(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing
provisions;
(c) amounts used (ie incurred and charged against the provision) during the
period ;
(d) unused amounts reversed during the period ; and
(e) [Refer Appendix 1]
Comparative information is not required.
Provided that a Small and Medium-sized Companies as defined in the MCA
notification and Small and Medium-sized Entity (level II and Level III non-
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corporate entities) as per the criteria prescribed by the ICAI, may not comply
with paragraph 84 above.
85 An entity shall disclose the following for each class of provision:
(a) a brief description of the nature of the obligation and the expected timing
of any resulting outflows of economic benefits;
(b) an indication of the uncertainties about the amount or timing of those
outflows. Where necessary to provide adequate information, an entity shall
disclose the major assumptions made concerning future events, as
addressed in paragraph 48;and
(c) the amount of any expected reimbursement, stating the amount of any
asset that has been recognised for that expected reimbursement.
Provided that a Small and Medium-sized Companies as defined in the MCA
notification and Small and Medium-sized Entity (level II and Level III non-
corporate entities) as per the criteria prescribed by the ICAI, may not comply
with paragraph 85 above.
86 Unless the possibility of any outflow in settlement is remote, an entity shall
disclose for each class of contingent liability at the end of the reporting period a
brief description of the nature of the contingent liability and, where practicable:
(a) an estimate of its financial effect, measured under paragraphs 3652;
(b) an indication of the uncertainties relating to the amount or timing of any
outflow; and
(c) the possibility of any reimbursement.
87 In determining which provisions or contingent liabilities may be aggregated to form a
class, it is necessary to consider whether the nature of the items is sufficiently similar
for a single statement about them to fulfil the requirements of paragraphs 85(a) and
(b) and 86(a) and (b). Thus, it may be appropriate to treat as a single class of
provision amounts relating to warranties of different products, but it would not be
appropriate to treat as a single class amounts relating to normal warranties and
amounts that are subject to legal proceedings.
88 Where a provision and a contingent liability arise from the same set of circumstances,
an entity makes the disclosures required by paragraphs 8486 in a way that shows the
link between the provision and the contingent liability.
89 [Refer Appendix 1].
19
90 [Refer Appendix 1].
91 Where any of the information required by paragraphs 86 and 89 is not disclosed
because it is not practicable to do so, that fact shall be stated.
92 In extremely rare cases, disclosure of some or all of the information required by
paragraphs 8489 can be expected to prejudice seriously the position of the
entity in a dispute with other parties on the subject matter of the provision,
contingent liability or contingent asset. In such cases, an entity need not disclose
the information, but shall disclose the general nature of the dispute, together
with the fact that, and reason why, the information has not been disclosed.
20
Illustration A
Tables - Provisions, Contingent Liabilities and Reimbursements
The purpose of this illustration is to summarise the main requirements of the Accounting
Standard. It does not form part of the Accounting Standard and shall be read in the context
of the full text of the Accounting Standard.
Provisions, Contingent Liabilities
Where, as a result of past events, there may be an outflow of resources embodying
future economic benefits in settlement of: (a) a present obligation the one whose
existence at the balance sheet date is considered probable; or (b) a possible obligation
the existence of which at the balance sheet date is considered not probable.
There is a present There is a possible There is a possible
obligation that probably obligation or a present obligation or a present
requires an outflow of obligation that may, but obligation where the
resources and a reliable probably will not, require likelihood of an outflow of
estimate can be made of the an outflow of resources. resources is remote.
amount of obligation.
A provision is recognised No provision is recognised No provision is recognised
(paragraph 14). (paragraph 27). (paragraph 27).
Disclosures are required for Disclosures are required for No disclosure is required
the provision (paragraphs 84 the contingent liability (paragraph 86).
and 85). (paragraph 86).
Reimbursements
Some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party.
The entity has no obligation The obligation for the The obligation for the
for the part of the amount expected to be amount expected to be
expenditure to be reimbursed remains with reimbursed remains with
reimbursed by the other the entity and it is virtually the entity and the
party. certain that reimbursement reimbursement is not
will be received if the entity virtually certain if the
21
settles the provision. entity settles the provision.
The entity has no liability for The reimbursement is The expected reimbursement
the amount to be reimbursed recognised as a separate asset is not recognised as an asset
(paragraph 57). in the balance sheet and may (paragraph 53).
be offset against the expense
in the statement of profit and
loss. The amount recognised
for the expected
reimbursement does not
exceed the liability
(paragraphs 53 and 54).
No disclosure is required. The reimbursement is The expected reimbursement
disclosed together with the is disclosed (paragraph
amount recognised for the 85(c)).
reimbursement (paragraph
85(c)).
22
Illustration B
Decision Tree
The purpose of the decision tree is to summarise the main recognition requirements of the
Accounting Standard for provisions and contingent liabilities. The decision tree does not
form part of the Accounting Standard and shall be read in the context of the full text of the
Accounting Standard.
Start
Present obligation No
Possible No
as a result of an
obligation?
obligation event?
Yes Yes
No Yes
Portable outflow? Remote?
Yes
No
Reliable estimate? No (rare)
Yes
Provide Disclose contingent Do nothing
liability
Note: 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 (paragraphs 15-16 of the Standard).
23
Illustration C
Illustrations: Recognition
This illustration illustrates the application of the Accounting Standard to assist in clarifying
its meaning. It does not form part of the Accounting Standard.
All the entities in the Illustration have 31 March year ends. In all cases, it is assumed that a
reliable estimate can be made of any outflows expected. In some Illustrations the
circumstances described may have resulted in impairment of the assets - this aspect is not
dealt with in the Illustrations.
The cross references provided in the Illustrations indicate paragraphs of the Accounting
Standard that are particularly relevant. The illustration shall be read in the context of the full
text of the Accounting Standard.
Illustration 1: Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract for sale the manufacturer undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within three years from the date of
sale. On past experience, it is probable (i.e. more likely than not) that there will be some
claims under the warranties.
Present obligation as a result of a past obligating event - The obligating event is the sale
of the product with a warranty, which gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement - Probable for the
warranties as a whole (see paragraph 24).
Conclusion - A provision is recognised for the best estimate of the costs of making good
under the warranty products sold before the balance sheet date (see paragraphs 14 and 24).
Illustration 2: Contaminated Land - Legislation Virtually Certain to be
Enacted
An entity in the oil industry causes contamination but does not clean up because there is no
legislation requiring cleaning up, and the entity has been contaminating land for several
years. At 31 March 2018, it is virtually certain that a law requiring a clean-up of land already
contaminated will be enacted shortly after the year end.
Present obligation as a result of a past obligating event - The obligating event is the
contamination of the land because of the virtual certainty of legislation requiring cleaning up.
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An outflow of resources embodying economic benefits in settlement - Probable.
Conclusion - A provision is recognised for the best estimate of the costs of the clean-up (see
paragraphs 14 and 22).
Illustration 3: Offshore Oilfield
An entity operates an offshore oilfield where its licensing agreement requires it to remove the
oil rig at the end of production and restore the seabed. Ninety per cent of the eventual costs
relate to the removal of the oil rig and restoration of damage caused by building it, and ten
per cent arise through the extraction of oil. At the balance sheet date, the rig has been
constructed but no oil has been extracted.
Present obligation as a result of a past obligating event - The construction of the oil rig
creates an obligation under the terms of the licence to remove the rig and restore the seabed
and is thus an obligating event. At the balance sheet date, however, there is no obligation to
rectify the damage that will be caused by extraction of the oil.
An outflow of resources embodying economic benefits in settlement - Probable.
Conclusion - A provision is recognised for the best estimate of ninety per cent of the
eventual costs that relate to the removal of the oil rig and restoration of damage caused by
building it (see paragraph 14). These costs are included as part of the cost of the oil rig. The
ten per cent of costs that arise through the extraction of oil are recognised as a liability when
the oil is extracted.
Illustration 4: Refunds Policy
A retail store has a policy of refunding purchases by dissatisfied customers, even though it is
under no legal obligation to do so. Its policy of making refunds is generally known.
Present obligation as a result of a past obligating event - The obligating event is the sale
of the product, which gives rise to an obligation because obligations also arise from normal
business practice, custom and a desire to maintain good business relations or act in an
equitable manner.
An outflow of resources embodying economic benefits in settlement - Probable, a
proportion of goods are returned for refund (see paragraph 24).
Conclusion - A provision is recognised for the best estimate of the costs of refunds (see
paragraphs 14 and 24).
25
Illustration 5: Legal Requirement to Fit Smoke Filters
Under new legislation, an entity is required to fit smoke filters to its factories by 30
September, 2017. The enterprise has not fitted the smoke filters.
(a) At the balance sheet date of 31 March 2017
Present obligation as a result of a past obligating event - There is no obligation because
there is no obligating event either for the costs of fitting smoke filters or for fines under the
legislation.
Conclusion - No provision is recognised for the cost of fitting the smoke filters (see
paragraphs 14 and 17-19).
(b) At the balance sheet date of 31 March 2018
Present obligation as a result of a past obligating event - There is still no obligation for
the costs of fitting smoke filters because no obligating event has occurred (the fitting of the
filters). However, an obligation might arise to pay fines or penalties under the legislation
because the obligating event has occurred (the non-compliant operation of the factory).
An outflow of resources embodying economic benefits in settlement - Assessment of
probability of incurring fines and penalties by non-compliant operation depends on the
details of the legislation and the stringency of the enforcement regime.
Conclusion - No provision is recognised for the costs of fitting smoke filters. However, a
provision is recognised for the best estimate of any fines and penalties that are more likely
than not to be imposed (see paragraphs 14 and 17-19).
Illustration 6: Staff Retraining as a Result of Changes in the Income Tax
System
The government introduces a number of changes to the income tax system. As a result of
these changes, an entity in the financial services sector will need to retrain a large proportion
of its administrative and sales workforce in order to ensure continued compliance with
financial services regulation. At the balance sheet date, no retraining of staff has taken place.
Present obligation as a result of a past obligating event - There is no obligation because
no obligating event (retraining) has taken place.
Conclusion - No provision is recognised (see paragraphs 14 and 17-19).
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Illustration 7: A Single Guarantee
During 2016-17, Entity A gives a guarantee of certain borrowings of Entity B, whose
financial condition at that time is sound. During 2017-18, the financial condition of Entity B
deteriorates and at 30 September 2017 Entity B goes into liquidation.
(a) At 31 March 2017
Present obligation as a result of a past obligating event - The obligating event is the
giving of the guarantee, which gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement - No outflow of
benefits is probable at 31 March 2017.
Conclusion - No provision is recognised (see paragraphs 14 and 23). The guarantee is
disclosed as a contingent liability unless the probability of any outflow is regarded as remote
(see paragraph 86).
(b) At 31 March 2018
Present obligation as a result of a past obligating event - The obligating event is the
giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement - At 31 March 2018,
it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation.
Conclusion - A provision is recognised for the best estimate of the obligation (see
paragraphs 14 and 23).
Note: This example deals with a single guarantee. If an entity has a portfolio of similar
guarantees, it will assess that portfolio as a whole in determining whether an outflow of
resources embodying economic benefit is probable (see paragraph 24). Where an entity gives
guarantees in exchange for a fee, revenue is recognised under AS 18, Revenue.
Illustration 8: A Court Case
After a wedding in 2016-17, ten people died, possibly as a result of food poisoning from
products sold by the entity. Legal proceedings are started seeking damages from the entity
but it disputes liability. Up to the date of approval of the financial statements for the year 31
March 2017, the entity's lawyers advise that it is probable that the entity will not be found
liable. However, when the entity prepares the financial statements for the year 31 March
2018, its lawyers advise that, owing to developments in the case, it is probable that the
enterprise will be found liable.
27
(a) At 31 March 2017
Present obligation as a result of a past obligating event - On the basis of the evidence
available when the financial statements were approved, there is no present obligation as a
result of past events.
Conclusion - No provision is recognised (see paragraph 15 and 16). The matter is disclosed
as a contingent liability unless the probability of any outflow is regarded as remote
(paragraph 86).
(b) At 31 March 2006
Present obligation as a result of a past obligating event - On the basis of the evidence
available, there is a present obligation. An outflow of resources embodying economic
benefits in settlement - Probable.
Conclusion - A provision is recognised for the best estimate of the amount to settle the
obligation (paragraphs 14-16).
Illustration 9A: Refurbishment Costs - No Legislative Requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the
balance sheet date, the lining has been in use for three years.
Present obligation as a result of a past obligating event - There is no present obligation.
Conclusion - No provision is recognised (see paragraphs 14 and 17-19).
The cost of replacing the lining is not recognised because, at the balance sheet date, no
obligation to replace the lining exists independently of the company's future actions - even
the intention to incur the expenditure depends on the company deciding to continue operating
the furnace or to replace the lining.
Illustration 9B: Refurbishment Costs - Legislative Requirement
An airline is required by law to overhaul its aircraft once every three years.
Present obligation as a result of a past obligating event - There is no present obligation.
Conclusion - No provision is recognised (see paragraphs 14 and 17-19). The costs of
overhauling aircraft are not recognised as a provision for the same reasons as the cost of
replacing the lining is not recognised as a provision in illustration 9A. Even a legal
28
requirement to overhaul does not make the costs of overhaul a liability, because no obligation
exists to overhaul the aircraft independently of the entity's future actions - the entity could
avoid the future expenditure by its future actions, for example by selling the aircraft.
Illustration 10: An Onerous Contract
An entity operates profitably from a factory that it has leased under an operating lease.
During December 2017 the entity 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 be
re-let to another user.
Present obligation as a result of a past obligating event - The obligating event occurs
when the lease contract becomes binding on the entity, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement - When the lease
becomes onerous, an outflow of resources embodying economic benefits is probable, (Until
the lease becomes onerous, the entity accounts for the lease under AS 17, Leases).
Conclusion - A provision is recognised for the best estimate of the unavoidable lease
payments.
29
Illustration D
Illustrations: Disclosure
This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the
application of the Accounting Standard to assist in clarifying its meaning.
An illustration of the disclosures required by paragraph 85 is provided below.
Illustration 1 Warranties
A manufacturer gives warranties at the time of sale to purchasers of its three product lines.
Under the terms of the warranty, the manufacturer undertakes to repair or replace items that
fail to perform satisfactorily for two years from the date of sale. At the balance sheet date, a
provision of Rs. 60,000 has been recognised. The following information is disclosed:
A provision of Rs. 60,000 has been recognised for expected warranty claims on products sold
during the last three financial years. It is expected that the majority of this expenditure will
be incurred in the next financial year, and all will be incurred within two years of the
balance sheet date.
An illustration is given below of the disclosures required by paragraph 92 where some of the
information required is not given because it can be expected to prejudice seriously the
position of the entity.
Illustration 2 Disclosure Exemption
An entity is involved in a dispute with a competitor, who is alleging that the entity has
infringed patents and is seeking damages of Rs. 1000 lakh. The entity recognises a provision
for its best estimate of the obligation, but discloses none of the information required by
paragraphs 84 and 85 of the Standard. The following information is disclosed:
Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed patents and is seeking damages of Rs. 1000 lakh. The
information usually required by AS 37, Provisions, Contingent Liabilities and Contingent
Assets is not disclosed on the grounds that it can be expected to prejudice the interests of the
company. The directors are of the opinion that the claim can be successfully resisted by the
company
30
Appendix 1
Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is only to
bring out the major differences, if any, between Accounting Standard (AS) 37 and the corresponding
Indian Accounting Standard (Ind AS) 37, Provisions, Contingent Liabilities and Contingent Assets.
Comparison with Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets
1 Paragraph 2 of Ind AS 37 has been shifted to 5(h) in AS 37 since it relates to exclusion
of financial instruments from the scope of this standard and covered by AS 109.
2 Paragraph 3 of Ind AS 37 defining executory contracts has been shifted under
Definitions in AS 37.
3 Since it was decided to formulate upgraded standards on construction contracts and
revenue corresponding to Ind AS 11, Construction Contracts, and Ind AS 18, Revenue,
respectively and not to formulate standard corresponding to Ind AS 115, Revenue from
Contracts with Customers, paragraph 5(a) and paragraph 6 of Ind AS 37 are modified
and paragraph 5(g) of Ind AS 37 is deleted.
4 Accounting Standard corresponding to Ind AS 104, Insurance Contracts, will not be
formulated. In order to clarify the position in this regard, provisions, contingent liability
and contingent asset of those arising in insurance entity from contracts with
policyholders have been specifically excluded from the scope of AS 37. Consequently,
paragraph 5(e) of Ind AS 37 has been deleted and appropriately added in paragraph
1(d) in AS 37.
5 Ind AS 37 requires disclosure of contingent assets in the financial statements when the
inflow of economic benefits is probable. While AS 37 does not require so and
prescribes that usually contingent assets are disclosed in the report of approving
authority instead of disclosure in the financial statements. Consequently, paragraphs
34-35 of Ind AS 37 have been modified and paragraphs 89-90 of Ind AS 37 have been
deleted.
6 Ind AS 37 requires that where the effect of the time value of money is material the
amounts of provisions should be the present value of the expenditures expected to be
required to settle the obligation. AS 37 prohibits discounting the amounts of provisions,
however, it requires discounting in case of decommissioning, restoration and similar
liabilities that are recognised as cost of Property, Plant and Equipment. Accordingly,
paragraph 36 of Ind AS 37 has been modified and following paragraphs of Ind AS 37
have been deleted:
(i) paragraphs 45-47 and their related heading,
(ii) paragraph 60 and
(iii) paragraph 84(e).
31
7 Paragraph 39 and following example and paragraph 40 of Ind AS 37 providing
explanation on measurement of provision where there is a large population of items and
where there is individual most likely outcome has been deleted for simplification.
8 Paragraph 67 and paragraph 77 of Ind AS 37 have been deleted for simplification of
standard since it was felt that these paragraphs are only clarificatory in nature.
9 Exemptions have been provided to the Small and Medium-sized Companies as defined
in the MCA Notification and Small and Medium-sized entity (level II and Level III
non-corporate entities), as per the criteria prescribed by the ICAI, from providing the
disclosures regarding provisions prescribed under paragraphs 84 and 85.
10 Appendix A, Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds, and Appendix B, Liabilities arising from Participating in
a Specific Market-- Waste Electrical and Electronic Equipment, of Ind AS 37 have not
included since it was felt that Appendix A is not relevant for entities to whom Ind AS
are not applicable. Appendix B has been deleted since it is specific to European
Union's Directive on Waste Electrical & Electronic Equipment (WE&EE) and is
practically not applicable in India. Appendix C, Levies, has not been included since it
was felt that it is not relevant for the entities to whom Ind AS are not applicable.
11 Illustration A, Tables Provisions, Contingent Liabilities and Reimbursements,
Illustration B, Decision Tree, and Illustration C, Illustrations: Recognition, and
Illustration D, Illustrations: Disclosures, of AS 29, Provisions, Contingent Liabilities
and Contingent Assets, have been included for providing guidance.
12 The following paragraph numbers appear as `Deleted' in Ind AS 37. In order to
maintain consistency with paragraph numbers of Ind AS 37, the paragraph numbers are
retained in AS 37 :
(i) paragraph 1(b)
(ii) paragraph 4
32
Appendix 2
Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is only to
bring out the major differences, if any, between Accounting Standard (AS) 37 and the Accounting
Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets.
Comparison with AS 29, Provisions, Contingent Liabilities and Contingent
Assets
1. Unlike AS 29, AS 37 requires creation of provisions in respect of constructive obligations
also [However, AS 29 requires creation of provisions arising out of normal business
practices, custom and a desire to maintain good business relations or to act in an equitable
manner]. This has resulted in some consequential changes also. For example, definitions
of provision and obligating event have been revised in AS 37, while the terms `legal
obligation' and `constructive obligation' have been inserted and defined in AS 37.
Similarly, the portion of AS 29 pertaining to restructuring provisions has been revised in
AS 37.
2. AS 37 makes it clear that before a separate provision for an onerous contract is
established, an entity should recognise any impairment loss that has occurred on assets
dedicated to that contract in accordance with AS 36. There is no such specific provision
in AS 29.
3. AS 29 states that identifiable future operating losses up to the date of restructuring are not
included in a provision. AS 37 gives an exception to this principle viz. such losses related
to an onerous contract.
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