ICAI Notes- Unit 2: Liabilities Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

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ADVANCED ACCOUNTING  
 6.28 
 
 
 
 
LEARNING OUTCOMES 
UNIT 2: AS 29 (REVISED) 
PROVISIONS, CONTINGENT LIABILITIES AND 
CONTINGENT ASSETS 
 
 
 
After studying this unit, you will be able to comprehend the – 
? Meaning of  ‘Executory contracts’, ‘Provision’, ‘Liability, Obligating 
event’ and other related terms used in the standard; 
? Need for recognition of provision; 
? Definition of Present Obligation and Past Event; 
? Probable Outflow of Resources Embodying Economic Benefits;  
? Application of the Recognition and Measurement Rules;  
? Disclosure requirements as per the Standard. 
 2.1 INTRODUCTION 
AS 29 (Revised) came into effect in respect of accounting periods commenced on 
or after 1-4-2004.  The objective of AS 29 (Revised) is to ensure that appropriate 
recognition criteria and measurement bases are applied to provisions and 
contingent liabilities and sufficient information is disclosed in the notes to the 
financial statements to enable users to understand their nature, timing and 
amount. The objective of AS 29 (Revised) is also to lay down appropriate 
accounting for contingent assets. 
Companies would create provisions on arbitrary basis when profits in a particular 
year is more and then reverse those provisions when profits are lower in 
subsequent years. This would lead to manipulation of profits. This is popularly 
known as ‘profit smoothing”. 
© The Institute of Chartered Accountants of India
Page 2


 
ADVANCED ACCOUNTING  
 6.28 
 
 
 
 
LEARNING OUTCOMES 
UNIT 2: AS 29 (REVISED) 
PROVISIONS, CONTINGENT LIABILITIES AND 
CONTINGENT ASSETS 
 
 
 
After studying this unit, you will be able to comprehend the – 
? Meaning of  ‘Executory contracts’, ‘Provision’, ‘Liability, Obligating 
event’ and other related terms used in the standard; 
? Need for recognition of provision; 
? Definition of Present Obligation and Past Event; 
? Probable Outflow of Resources Embodying Economic Benefits;  
? Application of the Recognition and Measurement Rules;  
? Disclosure requirements as per the Standard. 
 2.1 INTRODUCTION 
AS 29 (Revised) came into effect in respect of accounting periods commenced on 
or after 1-4-2004.  The objective of AS 29 (Revised) is to ensure that appropriate 
recognition criteria and measurement bases are applied to provisions and 
contingent liabilities and sufficient information is disclosed in the notes to the 
financial statements to enable users to understand their nature, timing and 
amount. The objective of AS 29 (Revised) is also to lay down appropriate 
accounting for contingent assets. 
Companies would create provisions on arbitrary basis when profits in a particular 
year is more and then reverse those provisions when profits are lower in 
subsequent years. This would lead to manipulation of profits. This is popularly 
known as ‘profit smoothing”. 
© The Institute of Chartered Accountants of India
 
 
 LIABILITIES BASED ACCOUNTING STANDARDS 
 
 
 
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 6.29 
 
Thus, there is a need for certain parameters on the basis of which provisions are 
measured and recognised, as they impact both Profit and Loss Statement and 
Balance Sheet (creation of an expense and creation of a liability).  
AS-29 prescribes the guidance in respect of recognition, measurement and 
disclosures of provisions, contingent liabilities and contingent assets. 
The standard clearly defines the role of management while making an estimate 
for creating provisions and the auditors to vouch for the correctness or otherwise 
of the estimate made by the management. This ensures that manipulations do 
not take place at the time of creation of provisions. 
Earlier, the companies were not recognising the liability on the ground of 
uncertainty regarding its timing or amount. With the issuance of AS 29, 
transactions which qualify for creating a provision need to be accounted for in the 
Balance sheet as a liability.  
Example 1 
During 20X1, XY Enterprise has made lower amount of profits. However, to ensure 
that the Earnings Per Share do not decline significantly, XY Enterprise does not 
provide for a warranty amount which should have been provided for. XY is 
confident of higher amount of profits during later years, and would like to take this 
provision to the later stage. This ensures consistent performance for the company 
throughout the period. With AS 29, this anomaly stands removed. 
Example 2 
During 20X1, AB Shops has made huge profits during a particular year. This may 
have resulted in payment of taxes on these profits. Further, AB Shop’s management 
foresees challenges in operations in later years, and therefore, low profits. AB Shop 
did not create a provision during 20X2 which should have been otherwise made. 
However, to get the desired impact, AB Shop created the provision in 20X1. Since, 
the intention of management is not to reflect a true and fair view; AS-29 would 
ensure appropriate provisions are made in 20X2 only. 
AS 29 helps to ensure transparency of information in Financial Statements. 
© The Institute of Chartered Accountants of India