aayush pandey (article assistant) (26 Points)
11 October 2016A party not record the bills discounting as a contingent liability in foot notes in balance sheet rather it create a provision for the same,which will be reverse when opposite party from whom B/R receive makes the payment to bank,"is this treatment is correct". If yes then can provision made by record assets & liability at the same time instead made provision from PL a/c.
Ashok Kumar
(CA qualified)
(389 Points)
Replied 11 October 2016
According to AS 29, provisions can be created only if 3 conditions are satisfied, of which first condition says there should be a present obligation as a result of past event. The past event in your case which requires provision to be created could only be "not meeting the liability on due date by the drawer", and not "discounting the bills with the banker". And there is no present obligation on the drawee's part to pay to the banker unless the drawer has defaulted which is a future event. Thus only a contingent liability can be disclosed, unless the possibility of outflow of resources having economic benefits is remote
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