Page 5 - 13. COMPILER QB - INDAS 37

Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets” defines an onerous contract as “a
contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic
benefits expected to be received under it”.

Ind AS 37 states that “the unavoidable costs under a contract reflect the least net cost of exiting from the
contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure
to fulfill it”.
In the instant case, the cost of fulfilling the contract is Rs 0.5 million (Rs 2.5 million – Rs 2 million) and
the cost of exiting from the contract by paying a penalty is Rs 0.25 million. In accordance with the above

reproduced paragraph, it is an onerous contract as the cost of meeting the contract exceeds the economic
benefits.
Therefore, the provision should be recognised at the best estimate of the unavoidable cost, which is lower of
the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it, i.e., at Rs 0.25
million (lower of Rs 0.25 million and Rs 0.5 million).

Q4 (May 20)

A company manufacturing and supplying process control equipment is entitled to duty drawback if it exceeds
its turnover above a specified limit. To claim duty drawback, the company needs to file an application within
15 days of meeting the specified turnover. If application is not filed within stipulated time, the Department
has discretionary power of giving duty drawback credit. For the year 20X1-20X2 the company has exceeded

the specified limit of turnover by the end of the reporting period. However, duty drawback can be claimed on
filing of application within the stipulated time or on discretion of the Department if filing of application is
late. The application for duty drawback is filed on April 20, 20X2, which is after the stipulated time of 15
days of meeting the turnover condition. Duty drawback has been credited by the Department on June 28,
20X2 and financial statements have been approved by the Board of Directors of the company on July 26,
20X2. What would be the treatment of duty drawback credit as per the given information?

Solution
In the instant case, the condition of exceeding the specified turnover was met at the end of the reporting

period and the company was entitled for the duty drawback. However, the application for the same has been
filed after the stipulated time. Therefore, credit of duty drawback was discretionary in the hands of the
Department. Since the claim was to be accrued only after filing of application, its accrual will be considered in
the year 20X2-20X3 only.
Accordingly, the duty drawback credit is a contingent asset as at the end of the reporting period 20X1-20X2,

which will be realised when the Department credits the same.
As per Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, contingent assets are assessed
continually to ensure that developments are appropriately reflected in the financial statements. If it has
become virtually certain that an inflow of economic benefits will arise, the asset and the related income are
recognised in the financial statements of the period in which the change occurs. If an inflow of economic

benefits has become probable, an entity discloses the contingent asset.
In accordance with the above, the duty drawback credit which was a contingent asset for the F.Y. 20X1-20X2
should be recognised as an asset and related income should be recognized in the reporting period in which the
change occurs. i.e., in the period in which realisation becomes virtually certain, i.e., F.Y. 20X2 - 20X3.

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