Income Computation and Disclosure Standards

Prepared by Khusbu M Kinger

Introduction:

• ICDS are applicable for computation of income chargeable under the head “PGBP” and “IFOS” for all assessees following mercantile system of accounting (other than individuals or HUF not required to get his/her accounts to be audited under Section 44AB) w.e.f. AY 2017-2018.
• ICDS shall also apply to the persons computing income under the relevant presumptive taxation scheme. For Eg, for computing presumptive income of a partnership firm under Section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts of turnover, as the case may be.
• The general provisions of ICDS shall also apply to Banks, NBFCs, Insurance, Power sector, etc unless there are sector specific provisions contained in the Act or ICDS.
• The provisions of ICDS shall also apply for computation of income on gross basis for arriving at the amount chargeable to tax like royalty, interest, FTS under Section 115A taxable on gross basis for non-residents.
• ICDS shall apply irrespective of whether AS or Ind AS is followed.
• ICDS would not apply for the purposes of maintenance of books of accounts.
• ICDS would indirectly have an impact on whether or not TDS provisions are attracted to an individual/HUF, even though ICDS are meant only for computation of income and not for any other purpose. (in determining the turnover under Section 44AB)
• In case of conflict between the income Tax Act, 1961 and ICDS, the Act would prevail.
• In case of conflict between the Income Tax Rules, 1962 and ICDS, the Rules would prevail.
• ICDS provisions shall not apply for computation of MAT.
• ICDS provisions shall apply for computation of AMT.

 

ICDS No.	ICDS Name	Corresponding AS
ICDS – 1	Accounting Policies	AS-1
ICDS – 2	Valuation of Inventories	AS-2
ICDS – 3	Construction Contracts	AS-7
ICDS – 4	Revenue Recognition	AS-9
ICDS – 5	Tangible Fixed Assets	AS-10
ICDS – 6	The Effects of Changes in Foreign Exchange Rates	AS-11
ICDS – 7	Government Grants	AS-12
ICDS – 8	Securities	AS-13
ICDS – 9	Borrowing Cost	AS-16
ICDS – 10	Provision, Contingent Liabilities and Contingent Assets	AS-29

 

ICDS – 1 Accounting Policies:

• This ICDS deals with the significant accounting policies.
• The ICDS recognizes the fundamental accounting assumption of Going Concern, Consistency and Accrual, but does not recognize the concept of Prudence and Materiality.
• If a fundamental accounting assumption is not followed, the fact shall be disclosed.
• Treatment and presentation of transactions and events shall be based on substance over legal form.
• Marked to Market loss or an expected loss is not to be recognized unless recognition of such loss is in accordance with the provisions of any other ICDS.
• Principles of MTM loss or an expected loss shall also apply mutatis mutandis to MTM gains or expected profit.
• A change in accounting policies can be made if there is a “reasonable cause”.
• A change in accounting method i.e. change from mercantile to cash basis does not amount to change in accounting policies.
• All significant accounting policies adopted by a person shall be disclosed.
• Any change in accounting policy which has a material effect shall be disclosed.

ICDS – 1 Accounting Policies	AS -1 Disclosure of Accounting Policies
Removed Prudence and Materiality from the Fundamental Assumptions.	The major considerations are prudence, substance over form, and materiality.
There is a specific provision that marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other ICDS. However, ICDS is silent on the treatment of mark- to- market unrealised gains.	Mark to market losses will be provided for in view of prudence concept. Expected losses will be provided for in accordance with relevant Indian GAAP standards.
Changes in accounting policy will not be done unless for a ‘reasonable cause’. ICDS does not define reasonable cause and thus would involve exercise of judgement by management and tax authorities.	Changes in accounting policies should be made only if it is required by statute, for compliance with an Accounting Standard or for a more appropriate presentation of the financial statements on a prospective basis.
ICDS ‘does not’ consider prior period items inclusion in determination of net profit or loss of the period in which the error pertaining to a prior period is discovered.	Prior period items are included in determination of net profit or loss of the period in which the error pertaining to a prior period is discovered and are separately disclosed in the statement of profit and loss in a manner that the impact on current profit or loss can be perceived.

 

 

ICDS – 2 Valuation of Inventories:

• ICDS shall be applicable for valuation of inventories except in the following cases:
• WIP arising under ‘construction contract’ or any other ICDS.
• Shares, debentures and other financial instruments held as stock‐in‐trade
• Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realizable value
• Machinery spares, which can be used only in connection with a tangible fixed asset.
• Inventories shall be valued at cost or net realizable value whichever is lower.
• Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
• The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.
• The costs of services shall consist of labor and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.
• The costs of conversion of inventories shall include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods.
• In case of by-product, scrap or waste, its NRV shall be deducted from the main product.
• Cost of inventories shall exclude the following:
• Abnormal amount of wasted materials, labor or other production costs.
• Storage costs.
• Administrative overheads that do not bring inventories to their present location and condition.
• Selling costs.
• The valuation of raw materials and other supplies used in production shall be valued at cost only and not NRV. However, if there is decline in its price and estimated cost of finished goods would be less than NRV, then material shall be valued at NRV. (which shall be replacement cost).

 

ICDS – 2 Valuation of Inventories	AS – 2 Valuation of Inventories
Cost of inventories shall include cost of services. Cost of services shall consist of labour and other cost of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.	Cost of services is not given in the AS.
Retail method is permitted as technique for measurement of cost if it is impracticable to use ‘FIFO’ or ‘Weighted Average Cost Formula’.	Techniques such as standard cost or retail method may be used for convenience, if the results approximate the actual cost.
As per ICDS, in case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value.	As per AS – 2, these situations are not considered under it considering the going concern assumption.
As per ICDS the method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause.	As per AS – 2 , a change in method of valuation of inventories should be made only if it is required by statue or for compliance with an AS or if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.
As per ICDS the value of the inventory as on the beginning of the previous year shall be the cost of inventory available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and the value of the inventory as on the close of the immediately preceding previous year, in any other case.	Whereas as per AS -2, there is no such specific provision in it.

 

 

ICDS – 3 Construction Contract

• Contract revenue and contract cost associated with the construction contract are recognized on Percentage of Completion Method.
• Where outcome of the contract cannot be estimated reliably during the early stages of contract, contract revenue can be recognized only to the extent of cost incurred. Early stage of contract shall not extend beyond 25% of stage of completion.
• Escalation in price of a contract or export incentives shall be deemed to be income of the PY in which reasonable certainty of realization is achieved.
• Retention money shall be recognized as revenue subject to reasonable certainty of its ultimate collection condition. Any contingency on collection shall not be recognized.
• These provisions of ICDS shall also apply to real estate developers, BOT projects and leases.

 

ICDS – 3 Construction Contract	AS – 7 Construction Contracts
ICDS prescribes use of percentage of completion method except during early stages of a contract when the outcome of the contract cannot be estimated reliably. In this case, revenue is recognised to the extent of cost incurred. This is possible only up to 25% of the work is completed otherwise proportionate method will apply. Thus, profit recognition has to start compulsorily once 25% stage is completed.	Under AS 7, contract revenue and contract cost are recognised by reference to the percentage of completion method if the outcome of the contract can be estimated reliably, else, revenue is recognised only to the extent of costs incurred if recovery is probable.
As per ICDS, pre – construction income in the nature of interest, dividend and capital gains shall not be reduced from the cost of construction, rather they will be taxed as income. But incomes other than interest, dividend and capital gains shall be reduced from contract cost which are not included in contract revenue.	As per AS – 7, cost that relate directly to a specific contract may be reduced by ‘any’ incidental income that is not included in contract revenue.
As per ICDS, contract costs are to be recognised as an expense in the period in which they are incurred and thus expected loss should be recognised in proportion of work completed.	As per AS – 7, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately.

 

 

ICDS – 4 Revenue Recognition

• It deals with the basis of recognition of revenue arising during the ordinary activities of a person from sale of goods, rendering of services, and use of entity’s resources by other persons yielding interest, dividend or royalty.

Sale of Goods	Signification risks and rewards of ownership are transferred and there is reasonable certainty of its ultimate collection
Revenue from service transactions	Percentage Completion Method/Straight Line Method/Project Completion Method.
Interest	Accrual on time basis
Interest on refund of any tax, cess, or duty	Recognized in the PY in which such interest was received
Royalties	Accrue as per the term of the relevant agreement unless there is other systematic and rational basis
Dividend	Recognized as per the provisions of the Act

 

• Interest and royalty shall be recognized as per the above table even if there is no reasonable certainty of subsequent collection. Non-recovery can be claimed as deduction later under Section 36 (bad debts).

 

ICDS – 4 Revenue Recognition	AS – 9 Revenue Recognition
ICDS, prescribes only one method for recognising revenue from service transaction i.e. ‘percentage completion method’ alone.	AS – 9, prescribes two methods for recognising revenue from service transactions that are ‘percentage completion method’ and ‘completed service contract method’. The methods could be used either or ways.

 

ICDS – 5 Tangible Fixed Assets

• It deals with the treatment of tangible fixed assets.
• Machine spares are charged to revenue as and when consumed.
• If machine spares are used only in connection with the tangible fixed asset and their use is expected to be irregular, then machine spares will be capitalized.
• Stand-by and servicing equipment are to be capitalized.
• The cost of tangible fixed assets includes the purchase price, duties and taxes except those subsequently recoverable and any directly attributable expenditure on making the asset ready for its use. Trade discounts, rebates and other similar items shall be deducted.
• The expenditure on start-up and commissioning of the project, including the expenditure on test runs and experimental production shall be capitalized.
• The expenditure incurred after the plant has begun commercial production shall be treated as revenue expenditure.
• Expenses incurred after the test runs and experimental production but before the commencement of commercial production shall be capitalized.

ICDS – 5 Tangible Fixed Assets	AS – 10 Property, Plant and Equipment
ICDS, prescribes that when a tangible fixed asset is acquired in exchange for another asset, or in exchange for shares or other securities , the fair value of the tangible fixed asset so acquired shall be its actual cost.	AS – 10, prescribes that when fixed asset is acquired in exchange for another asset, shares or other securities issued, cost of asset acquired should be recorded either at fair market value of asset given up / shares or securities issued or fair market value of asset acquired, whichever is more clearly evident.
ICDS, prescribes capitalization of machinery spares which can be used only in connection of tangible fixed asset and its use is irregular.	As per AS -10, spares which can be used only in an item of fixed asset and its use is expected to be irregular should be allocated on a systematic basis over a period not exceeding the useful life of the principle item.
ICDS, does not incorporates in itself the provisions relating to revaluation of fixed assets, hence revaluation would not be recognised while computing income.	Whereas AS -10, recognised the concept of revaluation well while calculating income.
ICDS, suggests that income arising on transfer of a tangible fixed asset shall be computed in accordance to the provisions of the Act.	Whereas as per AS -10, the gain or loss arising on disposal are generally recognised in the profit and loss statement and in case of loss arising out of revalued asset, an increase which was previously recorded as credit to revaluation reserve and which has not been subsequently reversed or utilised, it is charged directly to that account.

 

ICDS – 6 Effect of Changes in Foreign Exchange Rate

• This ICDS deals with treatment of transactions in foreign currencies, translating the financial statements of foreign operations, and treatment of forward contracts involving foreign currencies.

Foreign Currency Transactions

• A foreign currency transaction shall be recorded at the actual rate at transaction date or a weekly or monthly average rate.
• However, if the exchange rate fluctuates significantly then the actual rate shall be used.

Conversion in Reporting Currency at the last day of each PY

Item	Exchange Rate
Foreign Currency Monetary Item	Closing rate
Foreign Currency Non-monetary item	Rate at Transaction date
Foreign Currency Non-monetary item being inventory which is valued at NRV	Rate at Valuation date

 

Recognition of Exchange Difference

Items	On Conversion (last day) – MTM	On Settlement
Monetary Item	Gain – Taxable Loss – Allowed	Gain – Taxable Loss – Allowed
Non- monetary Item	Gain – Not taxable Loss – Not allowed	Gain – Taxable Loss – Allowed

 

Foreign Operations

Financial statement of foreign operations shall be translated using the same principle as in case of foreign currency transaction.

Forward Exchange Contracts

Forward contracts into for speculation, trading, hedging foreign currency risk of firm commitment or highly probable forecast transaction	Premium/Discount Exchange Differences shall be recognized only at the time of settlement
Other Forward Contracts	Premium/Discount shall be amortized over life of the contract Exchange difference (MTM) at end of PY shall be recognized as income or expense in every year On Renewal or cancellation, profit or gain shall be recognized in that PY

 

Premium or Discount = Difference of exchange rate at the inception of contract and forward rate specified in the contract.

ICDS – 6 Effect of Changes in Foreign Exchange Rate	AS – 11 The Effects of Changes in Foreign Exchange Rates
ICDS contains no scope exception for exchange differences arising from foreign currency borrowings which may be regarded as an adjustment to interest cost.	Whereas AS -11, contains an exception for exchange differences arising from foreign currency borrowings to the extent considered as an adjustment to interest costs.

ICDS – 7 Government Grants

• It deals with the treatment of government grants, which are also called as subsidies, cash incentives, duty drawbacks, etc.
• It does not deal with Government Assistance (other than in the form of Government Grants) and Government participation in the ownership of the enterprise.
• Government grant should not be recognized until there is reasonable assurance that the person shall comply with the conditions attached to it and the grant shall be received.
• Recognition of grant shall not be postponed beyond the actual date of receipt

Treatment of Government Grant

If grant is directly related to acquisition of any depreciable asset	It shall be reduced from actual cost.
If grant is not directly related to acquisition of any depreciable asset	Proportionate grant shall be reduced from the cost or WDV of the asset.
If grant is directly related to the acquisition of non-depreciable asset	Recognize as income over the same period over the cost of meeting such obligations charged to income
Grants receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs	Recognize as income of the period in which it is receivable.
Other Government Grants	Recognize as income over the periods necessary to match them with the related costs which they are intended to compensate.
Grant in the form of non-monetary assets given at a concessional rate	Recognize at acquisition cost

 

Treatment of Refund of Government Grant

• The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate.”
• The amount refundable in respect of a Government grant in other cases shall be applied first against any unamortized deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement.

ICDS – 7 Government Grants	AS – 12 Accounting for Government Grants
ICDS, does not prescribes the capitalization of government grants i.e. Government grant should either be treated as revenue receipt or should be reduced from the cost of fixed assets based on the purpose for which such grant or subsidy is given.	Whereas AS – 12, prescribes two broad approaches i.e capital approach or the income approach.
ICDS prescribes the conditions for recognition of government grants. They are: The person receiving the grant shall comply with the conditions attached to them and the grants will be received, but it firmly states that the recognition of government grants shall not be postponed beyond the date of actual receipt.	Whereas AS – 12, states the conditions for recognising the grants as follows: where there is reasonable assurance that the enterprise will comply with the conditions attached to them and where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. It firmly states that the mere receipt of a grant in no ways stands as a conclusive evidence that the conditions attaching to the grant have been or will be fulfilled.

 

ICDS – 8 Securities

It deals with securities in two parts – Part A and Part B.

Part A

• It deals with securities held as stock in trade.
• It does not deal with recognition of interest and dividend on securities covered by ICDS – 4 on revenue recognition, securities held by insurer and securities held by mutual funds, venture capital funds, banks and public financial institutions.

Initial Recognition

• A security on acquisition shall be recognized at actual cost. The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess.
• Where a security is acquired in exchange for other securities or in exchange for another asset, the fair value of security so acquired shall be its actual cost.
• Where unpaid interest has accrued before the acquisition of an interest-bearing security and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion of the interest is deducted from the actual cost.

Subsequent Measurement

• At the end of any previous year, the securities shall be valued at actual cost initially recognized or net realizable value at the end of that previous year, whichever is lower.
• The comparison of actual cost initially recognized and net realizable value shall be done category wise and not for each individual security.
• The securities shall be classified into the following categories i.e. Shares; Debt securities; Convertible securities; and Any other securities not covered here.
• The securities which are not listed on a recognized stock exchange shall be valued at actual cost initially recognized.
• Where the actual cost initially recognized cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method or weighted average cost formula.

Part – B

• It deals with securities held by specific entities, namely Scheduled banks or public financial institutions.
• Securities shall be classified, recognized and measured in accordance with the extant guidelines issued by the Reserve Bank of India in this regard and any claim for deduction in excess of the said guidelines shall not be taken into account. To this extent, the provisions of Income Computation and Disclosure Standard VI on the effect of changes in foreign exchange rates relating to forward exchange contracts shall not apply.

ICDS – 8 Securities	AS – 13 Accounting for Investments
As ICDS, deals with computation of income under business or other sources heads hence it only deals with securities held as stock – in – trade.	Whereas under AS – 13, securities held as stock-in-trade are outside the scope, however provisions of AS -13 relating to current investments are applicable to securities held as stock in trade with suitable modifications.
ICDS states that the securities should be valued at lower of cost or net realizable value. It further elaborates that the comparison of cost and NRV shall be done category wise and not for each individual security. The major heads of classification are (i) shares (ii) debt securities (iii) convertible securities (iv) any other securities not covered above.	Whereas, AS – 13, values long term and current investments differently, i.e long term investments are valued at cost and current investments are valued at cost or fair value whichever is lower.
ICDS, prescribes that the securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised.	AS -13, incorporates in itself no such condition related to recognition of cost of unlisted or listed but not quoted on a recognised stock exchange.
ICDS prescribes that where the actual cost initially recognised cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method.	AS – 13, incorporates in itself no such condition of first-in-first-out method.
ICDS, prescribes that when a security is acquired in exchange for other securities or for another asset, the fair value of the security so acquired shall be its actual cost.	Whereas AS -13, firmly prescribes that in case a security is acquired in exchange for another security, the fair value of the securities issued should be its actual cost. Whereas in case a security is acquired in exchange for another asset, acquisition cost of investment is fair value of the asset given up or fair value of the investment received if it is more clearly evident.

 

ICDS – 9 Borrowing Costs

• it deals with treatment of borrowing costs.
• It does not deal with the actual or imputed cost of owners’ equity and preference share capital.
• Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset.
• Other borrowing costs shall be recognized in accordance with the provisions of the Act.
• “Qualifying asset” means land, building, machinery, plant or furniture, being tangible assets; know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets; and inventories that require a period of twelve months or more to bring them to a saleable condition.
• The definition of borrowing costs is an inclusive definition. Bill discounting charges and other similar charges are covered as borrowing costs.
• When a portion of borrowing cost are disallowed under Section 14A, 43B, 40(a)(i), 40(a)(ia), 40(A)(2), etc these shall be excluded even for the purpose of capitalization under this ICDS.

For specific borrowing costs, the amount of borrowing costs to be capitalized from the date of borrowing on that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed.

For general borrowing costs, the amount of borrowing costs to be capitalized from the date of utilization of borrowed funds shall be computed using the following formula:

General Borrowing Cost x (Average Cost of Qualifying Asset/Average Cost of Total Asset).

The Average Cost of Qualifying Asset shall be computed as follows:

If qualifying asset remains throughout the period of previous year	(Opening + Closing Balance Sheet Value)/2
If qualifying asset does not appear on first day of the previous year	Closing Balance Sheet Value/2
If qualifying asset does not appear on last day of the previous year	(Opening Balance Sheet Value + Value on the date of put to use or completion)/2

 

For general borrowing cost, the average cost of qualifying asset and total asset shall not include cost of asset to the extent it is funded out of specific borrowings.

The capitalization of general borrowing cost shall be done on asset-by-asset basis.

The capitalization of borrowing costs shall cease when the asset is first put to use and in case of inventory when substantially all the activities necessary to prepare such inventory for its intended sale are complete.

ICDS – 9 Borrowing Costs	AS – 16 Borrowing Cost
ICDS is similar to AS -16 except that exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest cost are not covered under it.	Whereas AS – 16, includes in itself exchange difference arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
ICDS, to remain in tandem with the Act brought a major change. I.e all assets ( tangible as well as intangible ) other than inventories regardless of the time, will be considered for capitalization of borrowing cost. Hence for capitalization the condition of extension has been removed.	As per AS – 16, Qualifying asset is one which takes substantial period of time to get ready for its intended use or sale.
ICDS, prescribes that commencement of capitalization should begin as follows: In case of specific borrowings from the date on which funds were borrowed and in case of general borrowings from the date on which funds were utilised.	Whereas AS – 16, prescribes three conditions to be fulfilled in entirety before the commencement of capitalization of borrowing cost. Those are: (i) Activities, which are essential to prepare the asset for its intended use, should be in progress. (ii) Borrowing cost is incurred. (iii) Expenditure for acquisition, construction or production of a qualifying asset is being incurred.
ICDS, contains in itself no condition as to suspension of capitalisation during interruption of active development.	Whereas AS- 16, prescribes that capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.

 

ICDS – 10 Provisions, Contingent Liabilities & Contingent Assets

It deals with deals with provisions, contingent liabilities and contingent assets, except those resulting from financial instruments; resulting from executory contracts; arising in insurance business from contracts with policyholders; and covered by another Income Computation and Disclosure Standard.

Provisions

• A provision shall be recognized when there is a present obligation as a result of a past event, it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.
• If these conditions are not met, no provision shall be recognized.
• No provision shall be recognized for costs that need to be incurred to operate in the future.
• It is only those obligations arising from past events existing independently of a person’s future actions, that is the future conduct of its business, that are recognized as provisions.
• Where details of a proposed new law have yet to be finalized, an obligation arises only when the legislation is enacted.
• Provisioning for employee benefit which are otherwise covered by AS 15 shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS-X.
• The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the previous year.
• The amount of a provision shall not be discounted to its present value.
• If expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when it is reasonably certain that reimbursement will be received if the person settles the obligation. The amount recognized for the reimbursement shall not exceed the amount of the provision.
• Where a person is not liable for payment of costs in case the third party fails to pay, no provision shall be made for those costs.
• Provisions shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an outflow of resources will be required to settle the obligation, the provision should be reversed.
• A provision shall be used only for expenditures for which the provision was originally recognized.

Contingent Liabilities

• “Contingent liability” is: (i) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the person; or (ii) a present obligation that arises from past events but is not recognised because: (A) it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or (B) a reliable estimate of the amount of the obligation cannot be made.
• A person shall not recognize a contingent liability.
• An obligation, for which a person is jointly and severally liable, is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties.

Contingent Assets

• “Contingent asset” is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the person.
• A person shall not recognize a contingent asset.
• Contingent assets are assessed continually and when it becomes reasonably certain that inflow of economic benefit will arise, the asset and related income are recognized in the previous year in which the change occurs.
• The amount recognized as asset and related income shall be the best estimate of the value of economic benefit arising at the end of the previous year.
• The amount and related income shall not be discounted to its present value.
• An asset and related income recognized shall be reviewed at the end of each previous year and adjusted to reflect the current best estimate. If it is no longer reasonably certain that an inflow of economic benefits will arise, the asset and related income shall be reversed.