The Accounting Standards are written policy documents issued by expert accounting body or by Government or by other regulatory body for bringing about a greater degree of uniformity covering the aspect of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement. Thus Accounting standards lay down the rules for measurement and presentation of accounting information by different enterprises. In India Institute of Chartered Accountant of India is authority and recently issued ACCOUNTING STANDARD-29(AS-29) for Provision, Contingent Liability, Contingent Assets and provision for restructuring cost and is applicable from accounting period commencing on or after 01-04-2004 and is mandatory in nature .This implies that the member of ICAI while discharging their attest function, has to examine that material item of Provision, Contingent Liability, Contingent Assets and provision for restructuring cost has been recognized, measured, treated ,presented and disclosed in the financial statement in compliance with AS29 and deviation if any there from are to be disclosed in their audit report so that the user of financial statement may be aware of such deviations.
The AS29 came into force w.e.f. 01-04-2004, it is therefore bound to have some queries on its compliance procedure In this article an attempt has been made to list and depict steps required for compliance of AS29 through matrix.
- List out all past events relating to the business of an enterprise resulting into an obligating event & possible assets on the balance sheet date, ( Col-1).
- Obligating event on the balance sheet date has been defined as,” an event that creates an obligation that result in an enterprise having no realistic alternative to settling that obligation.
- Possible assets on the balance sheet date may be defined as, “a possible assets if ,based on the evidence available ,its existence at the balance sheet date is considered not probable”.
- Segregate past event into obligating event(Col-2)& possible assets ( Col-3).
- An obligating event is possible obligation if, based on the evidence available its existence at the balance sheet date is considered not probable.
- An obligating event is present obligation if, based on the evidence available its existence at the balance sheet date is considered probable.
- Here probable is referred as,‘‘more likely than not’’
- Segregate obligating event into possible obligation (Col- 4), present obligation (Col- 5 ), and nil obligation (Col- 6).
- No action is required on Balance Sheet date in which obligating event is Nil. Col- 6.
- Determine/Calculate quantum and possibilities of out flow of resources on the balance sheet date on account of listed above possible and present obligations.
- The possible and present obligations on the balance sheet date for which quantum of out flow of resources are not material are to be listed separately. No action is required Col-7.
- Further segregate the possible obligation on which possibilities of out flow of resources on the balance sheet date is not probable and not remote(Col 8 ) or not probable and remote (Col 9).
- No action is required for possible obligation which is not probable and remote (Col 9).
- Further segregate the possible obligation, which is not probable and not remote that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the enterprise (Col. 10) and wholly within the control of enterprise (Col. 11).
- The schedule-VI of the Companies Act requires the disclosure irrespective of whether possibilities of out flow are remote or not. The Companies Act being statue will prevail over AS29 for the business enterprises incorporated under Companies Act.
- The possible obligation which is not probable and not remote that arises from the past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise is Contingent Liability.—Col-10.
- The present obligation is to be further segregated based on the fact that a reliable estimate of the amount of obligation can be made (Provision)- Col 12 and cannot be made (Contingent Liability).-Col 13.
- The provision as defined is, “A present obligation of the enterprise arising from past event, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits, which can be measured only by using a substantial degree of estimation”—-Col-12.
- For recognition of provision it is not necessary to identify the party to whom obligation is owed by the enterprise.
- Future event that may affect the amount required to settle an obligation should be reflected in the amount of provision where there is sufficient objective evidence that they will occur.The change in law may change the obligation and it should be reflected in amount of provision when legislation is virtually certain to be enacted.
- When the outflow of resources are probable for a class of similar obligation the provision should be made on collective basis instead of case to case basis indicating the opening balance, addition thereon, utilization there from and closing balance during that period.
- Further following disclosure is required viz a brief description of provision, major assumption about future events made while measuring the provision, indication of uncertain item, provision have been measured before tax, profit on expected disposal of assets even if closely linked with the provision have not been deducted from amount of provision and expected reimbursement have been recognized as an assets.
- A contingent liability is (a) a possible obligation that arises from the past events and the existence of which will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise (Col-10) Or (b) a present obligation that arises from past event but is not recognized because (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.or (ii) a reliable estimate of the amount of the obligation cannot be made. Col-13
- An enterprise if, is jointly and severally liable for an obligation in that case , the part of the obligation that is expected to be met by other parties is treated as contingent liability.
- Enterprise should not recognize the contingent liability but should disclose the following in the financial statement for each class of contingent liability at the balance sheet date unless disclosure of amount of the information is expected to prejudice seriously the case of enterprise in dispute with other party (a) A brief description of the nature of the contingent liability where practicable, (b) An estimate of the amount as per measurement principle as prescribed for provision, (c) An identification of uncertainties relating to any outflow, (d) The possibilities of any reimbursement, (e) Where any of the information required as above is not disclosed because it is not practicable to do so, that fact should be stated.
- The possible obligation which are not remote that arises from the past events and existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events wholly within the control of enterprise are termed as Restructuring Cost.—Col -11. The Restructuring Cost should include only the direct expenditure arising from restructuring and not associated with the on going activities of the enterprises. The Restructuring is defined as a program that is planned and controlled by management and materially changes either the scope of a business undertaken or the manner in which that business is conducted. The Restructuring Cost should not include the following, (a) The cost of retraining or relocating continuing staff, (b) Marketing cost, (c) Investment in new system and distribution network, (d) Expected loss on sale of assets due to restructuring.
- AS29 prescribes only the recognition and measurement criteria and doesn’t prescribe accounting for Provision for Restructuring Cost. Accordingly provision for cost that needs to be incurred to operate in future or future operating losses and future expenditure which can be avoided by future action because there is present obligation for that future expenditure should be recognized and measured but no accounting entry is required to be passed for the same.
- A Contingent Asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise.
- A list of contingent asset prepared as above on the balance sheet date is needed for the purpose of disclosure of the same in the Board of Directors Report (Col-15) as well as for continuous monitoring and assessment. During the course of continuous assessment if it has become virtually certain that an inflow of economic benefit will arise, the asset and related income are recognized in that period. An enterprise therefore should not recognize a contingent asset as it may result in the recognition of income that may never be realized. As herein explained above, if realization is virtually certain than related asset (Col-14) is recognized
- AS-29 is not applicable to (a) The special class of financial instrument such as derivatives which are carried at fair value but is applicable to those not carried at fair value. (b) Executory Contract which is defined as a contract under which either party has not performed any of its obligation or both have partially performed their obligations to an equal extent. (c) Insurance enterprises for those arising from contract between policy holder and insurance enterprises. However it applies to insurance enterprise other than those arising from contract with policyholders. (d) Where another accounting standard deals with specific type of provision, contingent liability. Contingent Asset and Provision for Restructuring Cost viz Accounting Standard for construction contract ,taxes on income, lease, and retirement benefits (e)Provision which are adjusted against the asset in the balance sheet and not shown as liability.
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