An overall Brief about As-29(Provisions, Contigent Liabilities and Assets)
· Provisions
Conditions to be satisfied
a) There must be present obligation as a result of a past event (Not future obligation)
b) It is probable (Here, probable means not 50:50 or 70:30 or else any other it is “More Likely than Not”. As per AS-29) that there will be an out flow of resources.
c)A reliable estimate can be made in respect of obligation which is to be settled.
Note:-If any one of the above conditions is not satisfied, No provision can be made
Provisions for Onerous Contracts
1st we have to know about Onerous Contract
Meaning: - It is a contract (Example:-Operating lease contract) under which the unavoidable cost (e.g. Lease rentals) of meeting the obligation under the contract is exceeding the economic benefits (for e.g. Cash inflows)
Eg:- X Ltd taken a machinery on finance lease for 5 years, But after the end of one year the company has relocated its operation to another place.
Now this machine has no use or not suitable to that location
And company has no other option except it has to pay lease rentals for another 4 years (Cz lease agreement is non cancellable one)
Now
The above is onerous contract because as there is no/nil economic benefits (e.g. cash inflows) for next 4 years but X Ltd has to pay Lease rentals for the remaining years.
Treatment for Onerous contracts
1.As per ASI-30 of AS-29 X Ltd cannot recognize total lease rental payable for 4 years in the current year because it will disturb the operating results of the current’s year.
Now the X ltd has to make provision in respect of unavoidable lease payments on yearly basis to the best estimate under AS-29 instead under As-19.
Note:-
.(where as as per International Accounting Standard -37 total lease rental payable for 4 years recognized in the current year)
Provisions for restructuring cost
A) Restructuring
Sale or Termination of a line of business
Closure of business in a country or region
B) Restructuring Cost
A provision for restructuring cost should include only the direct expenditure arising from restructuring and it should not include the following(Only Examples)
a)marketing cost
b)cost of retraining
c)Investment in distribution network.
Note:-provision for restructuring cost not be based on legal obligation but not on constructive obligation
Contingent Liability
Conditions
a)Possible obligation of past event
b)Existence of which will be confirmed only by the occurrence or non occurrence of future event
c)future in the control of the enterprise
Note:- Contingent Liability should be disclosed in the financial statements
Contingent Assets
Conditions
a)Possible asset as a result of a past events
b) Existence of which will be confirmed only by the occurrence or non occurrence of future event
c)future in the control of the enterprise
Note:- Contingent Assets should not be disclosed in the financial statements rather it should be disclosed in the report of approving authority(Directors report) where an inflow of economic benefits is probable.
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