Reversal of Earlier Year’s Provision
It is possible that subsequent judicial pronouncements/ appellate orders may make the provisions of earlier years excessive.
As per Accounting Standard (AS) 29, “Provisions, Contingent liabilities and Contingent Assets”, a provision should be recognised only when (a) an enterprise has a present obligation as a result of a past event, (b) it is possible that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.
Only in rare cases, e.g., a law suit, it may not be clear whether an enterprise has a present obligation. In such a case, an enterprise determines whether a present obligation exists at the balance sheet date by taking into account all available evidence. On the basis of such evidence, if it is more likely than not that a present obligation exists at the balance sheet date a provision is recognised (if other recognition criteria are also met). However, where it is more likely that no obligation exists at the balance sheet date, a contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.
On the above considerations, if there is no requirement to retain a provision, it can be reversed and the amount of liability is included in contingent liability. A suitable note on the following lines is recommended:
(a) Provision for Income Tax is arrived at after due consideration of decisions of the Appellate authorities and advice of counsels; and
(b) No provision is made for the disputed demands of Income tax keeping in view the judicial pronouncements and/or legal counsels’ opinion.