Select Your Location
The books of accounts do not recognise contingent liabilities. However, in Ind AS-37 Provisions, Contingent Liabilities and Contingent Assets, it is necessary to make disclosures of contingent liability in the Financial Statements if the possibility of an outflow of resources embodying economic benefits is not remote. Moreover, disclosures related to various commitments such as Capital Commitments, other commitments and uncalled liability of shares have been made necessary under Ind AS Schedule III.
AS 37 defines contingent liabilities as:
For example, an assessee challenged the demand raise by the tax authority in the court. The court’s decision will determine the liability. This pending court case shall be a possible obligation that arises from the past events and only after the court gives its decisions that its existence will be confirmed.
The term ‘Commitment’ has not been defined in Schedule III. It is only in the glossary of terms used in Financial Statements which has been issued by ICAI that the term ‘capital commitment’ has been defined as future liability for capital expenditure in respect of which contracts have been made. Drawing reference from the definition of capital commitment, ‘commitment’ can be defined as future liability for contractual expenditure. In the same manner, ‘other commitments’ will include all the expenditure related contractual commitments excluding capital commitments such as commitments that arise from long term contracts for purchasing of raw material, lease commitments, employee contracts etc.
The Contingent Liabilities can be classified in the following manner:
The Commitments can be classified in the following manner:
The contractual liabilities arise when a company gives guarantees to another person on behalf of the third person. For example: when a company becomes the guarantor for a loan being given to a subsidiary, or another company or guarantees that another company will perform its contractual obligations.
However, this guarantee cannot be taken by the company for performing its own obligations. This will not come within the purview of contingent liabilities and as a result cannot be reflected as contingent liability in the company’s balance sheet.
Ind AS 109, Financial Instruments recognise financial guarantees on the balance sheet. Therefore, all guarantees other than financial guarantees are to be disclosed as part of contingent liabilities on the company’s balance sheet.
The ‘other commitments’ must only include those non-cancellable contractual commitments (i.e. cancellation of which results in levying of penalty which is disproportionate to the benefits involved) based on professional judgment of the management and also which are material in understanding the Financial Statements of the company’ financial statements. For example, Commitments can be in the nature of commitment to fund subsidiaries and associates, commitment in the nature of buyback arrangements, derivative related commitments, non-disposal of investments in subsidiaries and undertakings etc. It must be noted that disclosures related to lease commitments for non-cancellable leases shall be given in accordance with Ind AS 116, Leases.
Moreover, according to Ind AS Schedule III, separate disclosure of the amount of dividends proposed to be distributed to both equity and preference shareholders for the period and the related amount per share needs to be made.
In cases where the securities have been issued for a specific purpose and if the whole or any portion of that amount has not been used for a specific purpose at the balance sheet date, then disclosure of the same shall be indicated by way of note, disclosing, how such unutilized amount have been used or invested.
Also in those cases where the borrowings have been drawn from the banks and other financial institutions for a specific purpose, and the same have not been used for that specific purpose, then the borrower company needs to make disclosure as to tell where the amount has been utilized. However, it is not necessary to provide in detail one-to-one relationship with the amount of borrowing and its utilization. Rather, disclosure should be made in a manner to give an overall position of the balance sheet at the reporting period.
Though it has not been made mandatory to recognise contingent liabilities in the books of accounts, yet AS-37 make it necessary to make disclosures if the possibility of an outflow of resources comprising economic benefits is not remote.
Read our Article:A detailed guide on IAS 12 on Income Taxes
Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.
Tax planning is a continuing effort and a management strategy for ensuring the minimization of...
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Infrastructure and real estate have been regarded as India's "sunshine sector" since the turn o...
On 22nd May 2023, the Central Board of Direct Taxes (CBDT) issued a new circular under secti...
Anyone can have different sources of income. With globalization and the opening up of economies...
The Reserve Bank of India (RBI) is crucial in regulating NBFC, including branch openings and cl...
In India, Non-Banking Financial Companies are subject to certain restrictions from taking publi...
It's usually a good idea to diversify the assets in your financial portfolio, especially during...
A nation is being built by the non-banking finance company through the development of wealth, t...
A corporate entity known as a portfolio manager complies with a contract or agreement with the...
Are you human?: 8 + 2 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
Standard of auditing 230 refers to the auditor's purpose in constructing documentation of audit, which gives an ade...
16 Nov, 2022
IAS 23 addresses whether interest or financing charges of borrowing money should be expensed or capitalized. The st...
05 Apr, 2022
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!