As - 29: contingenty liability vs provsn

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Vigneshwari @ Vicky

44 Points Posted on 21 July 2016

Dear All,

in our case, a company has given its land (FA) as security to another company's loan (obtained from Bank). later, the bank has transferred the Loan to IARC under sarfaesi act. is it necessary to make provision in our books? since the year, we have given the land as security, we are reporting it as Contingent liability in notes.

PLS GIVE YOUR COMMENTS AND OPINION...!!!!

Replies (2)

CA Saurabh Singh

Practising Chartered

819 Points Posted on 23 July 2016

Hello,

A provision is a liability which can be measured only by using a substantial degree of estimation, thta is managemnt has the estrimation of expenses,

Contingent liability is 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) a reliable estimate of the amount of the obligation cannot be made.

Hence the major difference between two is reliable degree of estimation.

If a contingent liability is made and further its estimation of losses can me made, we will create a provison for same, substantial degree means % lying between 30-50%

CA Kishore D

Management Consultant | Trainer

248 Points Posted on 23 July 2016

In this case, there cannot be a 'provision' that can be created. We give car as a security for a vehicle loan - this doesn't mean that we create a provision for it. Only the loan amount is recognized as a liability.

In this case, under the Fixed Asset schedule, the facts about security should be disclosed. Also a note should be given regarding the status and from the facts of the case, this looks like a clear 'contingent liability'