An NCLT scheme transfers the transferor company’s liabilities to the transferee company, including the provisions and the contingent liabilities. The accounting treatment is governed by Ind AS 37 and, for a business combination, by Ind AS 103.
The Provisions
A provision is recognised where the company has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made. The provision is measured at the best estimate of the expenditure required to settle the obligation, and it is discounted where the effect of the time value of money is material.
The Contingent Liabilities
A contingent liability is a possible obligation whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, or a present obligation that is not recognised because the outflow is not probable or the amount cannot be measured reliably. The contingent liability is disclosed in the financial statements.
The Business Combination
In a business combination, the acquirer recognises the contingent liabilities that are present obligations assumed in the combination, even if the outflow is not probable, provided the fair value can be measured reliably. The contingent liability is initially measured at fair value, and it is subsequently measured at the higher of the amount that would be recognised under Ind AS 37 and the initial amount less the cumulative amortisation.
A technically sound post-scheme accounting recognises the provisions and the contingent liabilities, measures them in accordance with the standards, and discloses the position in the financial statements.
Call to Action
Anuj Desai & Associates advises companies on the provisions and contingent liabilities in an NCLT scheme—from the Ind AS 37 recognition and the business combination adjustments to the measurement and the disclosure. If your scheme involves contingent liabilities, we can help you structure the accounting.
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