A Case Study on the Reliable Estimate of an Obligation Under Ind AS 37

Para 14 of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, states that a provision shall be recognized when

(a) an entity has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognized.

Further, Para 24 provides that where there are a number of similar obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognized (if the other recognition criteria are met).

This story discusses whether a product warranty where past data is not available be classified as a contingent liability or provision. If this obligation is a provision then how to reliably estimate this obligation under Ind AS 37 in the absence of firm-specific data.

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