Page 7 - 13. COMPILER QB - INDAS 37

MTPs QUESTIONS

Q6 (March 19)
During the year, QA Ltd. delivered manufactured products to customer K. The products were faulty and on 1st

October, 2016 customer K commenced legal action against the Company claiming damages in respect of losses
due to the supply of faulty products. Upon investigating the matter, QA Ltd. discovered that the products were
faulty due to defective raw material procured from supplier F. Therefore, on 1st December, 2016, the Company
commenced legal action against F claiming damages in respect of the supply of defective raw materials.
QA Ltd. has estimated that its probability of success of both legal actions, the action of K against QA Ltd.
and action of QA Ltd. against F, is very high.

On 1st October, 2016, QA Ltd. estimated that the damages it would have to pay K would be Rs. 5 crores. This
estimate was revised to Rs. 5.2 crores as on 31st March, 2017 and Rs. 5.25 crores as at 15th May, 2017. This
case was eventually settled on 1st June, 2017, when the Company paid damages of Rs. 5.3 crores to K.
On 1st December, 2016, QA Ltd. had estimated that it would receive damages of Rs. 3.5 crores from F. This

estimate was revised to Rs. 3.6 crores as at 31st March, 2017 and Rs. 3.7 crores as on 15th May, 2017. This
case was eventually settled on 1st June, 2017 when F paid Rs. 3.75 crores to QA Ltd. QA Ltd. had, in its
financial statements for the year ended 31st March, 2017, provided Rs. 3.6 crores as the financial statements
were approved by the Board of Directors on 26th April, 2017.
(i) Whether the Company is required to make provision for the claim from customer K as per applicable Ind
AS? If yes, please give the rationale for the same.

(ii) If the answer to (a) above is yes, what is the entry to be passed in the books of account as on 31st
March, 2017? Give brief reasoning for your choice.
A P&L A/c Dr. 5.2 Cr.
To Current Liab. A/c 5.2 Cr.
B P&L A/c Dr. 5.3 Cr.
To Non-Current Liab. A/c 5.3 Cr.
C P&L A/c Dr. 5.25 Cr.
To Current Liab. A/c 5.3 Cr.

(iii) What will be the accounting treatment of the action of QA Ltd. against supplier F as per applicable Ind
AS?
Solution

1. Yes, QA Ltd. is required to make provision for the claim from customer K as per Ind AS 37 since the claim
is a present obligation as a result of delivery of faulty goods manufactured. Also, it is probable that an

outflow of resources embodying economic benefits will be required to settle the obligations. Further, a
reliable estimate of Rs. 5.2 crore can be made of the amount of the obligation while preparing the
financial statements as on 31st March, 2017.

2. Option (A): Statement of Profit and Loss A/c Dr. Rs. 5.2 crore
To Current Liability A/c Rs. 5.2 crore

3. As per Ind AS 37, QA Ltd. shall not recognise a contingent asset. Here the probability of success of legal
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