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As 29 - understanding this whole contingent liability, provision, and reimbursement thing

X Ltd is battling a legal case in court since 2015. Up until 24th May, 2017, X Ltd's legal team provided absolute assurance that there would be no outflow of Future Economic Benfits (FEB). On that date, the tables have turned in court and the management, fearing outflow of FEB is not remote, deems it wise to disclose the matter as contingent liability in footnote of FY 17-18's Balance Sheet. Y Ltd, an associate of X Ltd, ever since the start of the case in 2015 has been constantly reassuring X Ltd that it would reimburse the legal expense if the matter at court ever turned upside down. On 3rd June, 2018, FEB outflow became inevitable as per ultimate declaration of court, and X Ltd is forced to made a provision for it. By end of March, 2020, it paid a whooping amount of Rs 200 Crore to the plaintiff. Still 300 crore is left to be paid. Rs 100 Crore is reimbursed by Y Ltd. Reimbursement of balance amount is also virtually certain. What shall be the treatment in financial Statements for YE 2020


Kumarjit Dey

Kumarjit Dey

CA Inter

4K+

29-Nov-20 12:07

12

Answers (2)

Best Answer

If reimbursement of balance is virtually certain, an asset (receivable) would be recognised and the expenses will be reduced to that extent.


Suraj Lakhotia

Suraj Lakhotia

Admin

29-Nov-20 18:00

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