Balancing the “Prudent Principle” & the “Overstatement of Liability”
Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated, and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision.
Expense and Liability
What is an Expense? Expense is an outflow of economic benefit that incurs a liability, resulting a decrease in equity (other than distribution to equity participant).
So, expense is something that incurs a liability. What is a Liability? A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Provisions Liability and Certain Liability
Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.
What are the tests for a recognizing a liability as per NFRS?
Present Obligation as a result of Past Event
On the basis of such evidence: (a) where it is more likely than not that a present obligation exists at the end of the reporting period, the entity recognises a provision; and (b) where it is more likely that no present obligation exists at the end of the reporting period, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. This is the case only: (a) where the settlement of the obligation can be enforced by law; or (b) in the case of a constructive obligation, where the event (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation.
An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from: (a) a contract (through its explicit or implicit terms); (b) legislation; or (c) other operation of law. A constructive obligation is an obligation that derives from an entity’s actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act (for example, a sufficiently specific public statement) by the entity gives rise to a constructive obligation. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted, where, such an obligation is treated as a legal obligation. Differences in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted.
Settlement of which leads to “Probable outflow of resources embodying economic benefits”
For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Standard, an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, ie the probability that the event will occur is greater than the probability that it will not. Where it is not probable that a present obligation exists, an entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
And “Reliable estimate of the obligation” can be made
The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other items in the statement of financial position. Except in extremely rare cases, an entity will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability.
The evidence considered includes any additional evidence provided by events after the reporting period. The estimates of outcome and financial effect are determined by the judgement of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the reporting period.
The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities.
But the “Opposite Entitlement” is not necessary test for NFRS? And it is necessary test for tax purposes?
An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed—indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will discharge its responsibilities.
Section 24: Accrual Basis Accounting
24(1): Any person shall, in maintaining accounts on the accrual basis of his income earned from business or investment subject to this Act, for purposes of tax, any income shall be included in computation of his income, considering that any payment has been received immediately when the right to receive such payment is created.
24(2): For the purposes of making deduction in computing income earned by any person as mentioned in sub-section (1), the following expenses shall be deemed to have been borne:
- If any payment involving such expenses has been made in lieu of a payment made by any other person, the expenses shall be deemed to have been borne in the following circumstances:
- The person has the liability to make that payment,
- The value of such liability can be ascertained in a realistic manner, and
- Payment has been received from another person.
- In all other circumstances except that mentioned in clause (a), an expense shall be deemed to have been borne at the time when payment is made.
24(3): Notwithstanding anything contained in sub-section (1), the Department may recognize the accounting specified by the Nepal Rastra Bank with respect to banking business, subject to the Nepal Rastra Bank Act, 2058 (2002) and prevailing laws relating to banking. Provided that a cooperative organization may keep accounting of interest income on cash basis.
24(4): Where, in computing, on the accrual basis, the income earned by any person from a business or investment, any payment receivable by that person is included or any payment to be borne by that person is deducted, and a difference occurs in the amount received or paid by that person because of, inter alia, difference in the exchange rate, the difference has to be adjusted in receiving or making payment.
Tax Arbitrage by the reason of Accounting Method
In the case where a particular payment is made between two persons accounting for tax on different bases, the intended recipient may derive the payment at a different time than the payer incurs the payment. Where the deriving is recognised for tax purposes after the incurring, there is the potential for tax deferral. Tax arbitrage of this type is only possible where different persons are able to use different methods of tax accounting.
What are the tests for a recognizing a liability as per Income Tax Act 2058?
एक्रुयल आधारको लेखाङ्कन एक्रुयल आधारको लेखाङ्कन (Accrual Basis of Accounting) अन्तर्राष्ट्रिय प्रचलनमा रहेको लेखाङ्कन पद्घति हो । नेपाल लेखामान (NAS 01: Presentation of Financial Statement) ले निकायको नगद प्रवाह बाहेक अन्य आर्थिक विवरण Accrual Basis मा राख्नुपर्ने व्यवस्था गरेको छ । ऐनको दफा २२ को उपदफा (३) मा कम्पनीले कर प्रयोजनको लागि Accrual Basis मा नै लेखाङ्कन गर्नुपर्ने स्पष्ट व्यवस्था गरेको छ ।
Accrual Basis of Accounting मा कुनै आर्थिक घटना वा कारोबार हुनासाथ नै लेखाङ्कन गरिन्छ । कारोबारहरू जुन समयसँग सम्बन्धित छ सोही समयमा नै लेखाङ्कन गरिने पद्घतिलाई एक्रुयल आधारको लेखाङ्कन भनिन्छ । यस्तो पद्घतिले आम्दानी र खर्चबीच (Matching Concept) लाई समेत पुष्ट्याई गर्न सहयोग पुग्ने हुन्छ । यस पद्घतिमा आय लेखाङ्कन गर्दा भुक्तानी पाउने अधिकार सिर्जना (Right to Receive) भएको अवस्थामा आय लेखाङ्कन गरिनु पर्छ भने खर्चको सन्दर्भमा भुक्तानी दिनुपर्ने दायित्व (Obligation to Pay) सिर्जना हुनासाथ खर्च भएको मानी लेखाङ्कन गरिनु पर्दछ । अर्थात यस किसिमको लेखाङ्कन पद्घतिमा नगद प्राप्ति वा भुक्तानीलाई मात्र आधार मानिदैंन ।
कुनै व्यक्तिको आय गणना गर्दा कट्टी गर्ने प्रयोजनको लागि देहायका खर्चहरू व्यहोरेको मानिनेछ:
1. the person is obliged to make the payment, and
पहिलो अवस्थाः सो व्यक्तिमा सो भुक्तानी गर्ने दायित्व रहेकोमा
भुक्तानी पाउने व्यक्ति निश्चित (Fixed Party Obligation – Liability) हुनु पर्दछ, अनिश्चित पार्टी भएको खर्च व्यवस्था (Probable Obligation – Provision) हुन्छ र व्यवस्था खर्च कट्टी हुँदैन ।
2. the amount of the obligation can be quantified with reasonable accuracy, and
दोस्रो अवस्थाः त्यस्तो दायित्वको मूल्य यथार्थपरक ढङ्गले अनुमान गर्न सकिने भएकोमा
एक्रुयल आधारमा खर्च कट्टी गर्न सो खर्चको रकम निश्चित (Measurable) हुनु पर्दछ । तिर्ने दायित्व नै भएमा पनि रकम अनिश्चित भएमा वित्तीय विवरणमा अनुमानित रकमको खर्च व्यवस्था (Estimated Loss Provision) हुन्छ र व्यवस्था खर्च कट्टी हुदैन ।
3. the other payment has been received
तेश्रो अवस्था: अर्को व्यक्तिबाट भुक्तानी प्राप्त भएकोमा
एक्रुयल आधारमा खर्च कट्टी गर्न सो खर्चको रकम भुक्तानी पाउने पक्षबाट प्राप्त हुनुपर्ने वस्तु वा सेवा प्राप्त भए बापतको रकम हुनु पर्दछ । वस्तु वा सेवा प्राप्त नभएको अवस्थामा भुक्तानीको पक्ष निश्चित भएको वा रकम निश्चित भए तापनि सो खर्च नभई अग्रिम खर्च (Prepaid) हुन्छ ।
माथिका अवस्थाबाहेक अन्य सबै अवस्थामा भुक्तानी गरिएको समयमा खर्च व्यहोरेको मानिनेछ । माथि उल्लेख गरिए अनुसार व्यवस्था खर्चलाई वित्तीय विवरणमा खर्च मानिए तापनि कर प्रयोजनमा खर्च मानिदैन । तर यस्ता व्यवस्थाबाट वास्तविक भुक्तानी भएका आय वर्षमा सो खर्चलाई खर्च कट्टी दिइन्छ । यस्ता खर्चहरू भने वास्तविक भुक्तानी (Actual Payment) को आधारमा खर्च ब्यहोरेको मानिन्छ ।
Comparing the NFRS-Tests and ITA-Tests for Recognition of Liability
Conditions to be fulfilled to recognize a Liability under NFRS | Conditions to be fulfilled to recognize a Liability under ITA |
There exists a Present Obligation as a result of Past Event | There should be opposite entitlement and obligation as a result of “the other payment” being received |
Reliable estimate of the obligation can be made and its settlement will lead to probable outflow of resources embodying economic benefits | The amount of the obligation can be quantified with reasonable accuracy |
The definitions of “amount derived” and “cost incurred” incorporate references to entitlement to a payment and an obligation to make a payment, respectively. In principle an income tax is targeted at creation of wealth or value added and not transfers of assets, thus “payments” under should involve a transfer causing a direct reduction of the payer’s assets or increase of the payer’s liabilities.
ITA outlines the content of the cash and accrual methods. The timing of amounts derived and costs incurred under the cash method is primarily aligned with the timing of the underlying payment. By contrast, under the accrual method the timing of amounts derived and costs incurred is typically an issue of entitlement to the underlying payment or an obligation to make the underlying payment.
However, the entitlement or obligation is not of itself sufficient for recognition that an amount is derived or a cost incurred under the accrual method. The amount of the underlying payment must be able to be determined with reasonable accuracy and there must be what is sometimes referred to as economic performance for the underlying payment. This means that where the underlying payment is to be made or received in return for another payment, the underlying payment is only incurred or derived to the extent the Other payment has been made. This is an example where the tax accounting method of the person making or receiving the other payment is irrelevant, there must be actual payment. For example, assume that a person sells trading stock to another person in return for cash. On the signing of the contract the purchaser will be entitled to the trading stock and obliged to make the cash payment and the vendor will have the opposite entitlement and obligation. However, the vendor will not derive the cash and the purchaser will not incur the cost of the cash payment under the accrual method until either the trading stock is transferred or the cash payment is made.
In conclusion, the key difference between the recognition of a provision liability for financial accounts and tax accounts is “opposite entitlement and obligation”. A constructive obligation and its kind may warrant a recognition of a provision under Financial Reporting Standards, but it does not fulfill the “opposite entitlement and obligation” test.
CSRs under Constructive Obligations
An entity has published a policy stating that it will clean up some smoke related damages that are normally being caused by such type of industries however the entity specifically mentions in its policy that it will clean up or fix those damages and this has been communicated to the parties concerned. This is one of the examples of constructive obligation. Even these kind of clean of smokes do not require any contractual obligation and it does not happen by any other entity within the same industry however since the entity itself created a policy and communicated to other parties that the entity will take such responsibilities and confirmed to discharge such responsibilities it will be covered under the definition of constructive obligation and hence will be eligible to create a provision for financial purpose.
A decision-making authority (either Board or at General meeting) decides to incur some expense e.g. some social benefits which has still not communicated to the parties (not necessary to the same parties) for whom the responsibilities will be discharged will not be constructive obligation. The communication should be made to the parties (not necessary to the same parties) to establish an expectation towards the discharge of these responsibilities then only it will fall under constructive obligation.
Another example could be Voluntary Retirement Scheme (VRS) which is normally announced at public and media etc and then it goes with approval processes and once an agreement is in place then only a provision is created. However after the applicability of the concept of constructive obligation, an entity will be able to create such VRS (as per our example) provision on the day when it is announced/ communicated to the public at large. It is to be noted that the communication to the public at large is enough and there is no specific need to identify that other party to whom such obligation needs to be discharged.
Recognition test for Financial Accounts:
- There exists a Present Obligation as a result of Past Event:
Yes, a constructive obligation - Reliable estimate of the obligation can be made, and its settlement will lead to probable outflow of resources embodying economic benefits:
Yes
Conclusion: Recognize for Financial Purpose
Recognition test for Tax Accounts:
- There should be opposite entitlement and obligation as a result of “the other payment” being received
No, the company is not contractually or legally obliged to deliver on such policy as yet. Further there may not be any conclusive indication that (i) the smoke related damages outweigh the societal benefits provided by the company (ii) the company has damaged the environment excessively above the industry median. - The amount of the obligation can be quantified with reasonable accuracy
Yes
Conclusion: Not Recognize for Tax Purpose
Provision for Staff Bonuses
An entity has declared a staff bonuses for the particular income year and has planned and communicated to its staffs to have them distributed as per its employment policy or in understanding with the employees. This is not a constructive obligation. It may be legal obligation (e.g. statutory bonuses) or contractual obligation (e.g. performance bonuses).
Recognition test for Tax Accounts:
- There should be opposite entitlement and obligation as a result of “the other payment” being received
Yes, the company is not contractually / legally obliged to distribute such bonuses. Further the company has received the opposite employment services from the employees and as a result “the other payment” has been received - The amount of the obligation can be quantified with reasonable accuracy
Yes
Conclusion: Recognize for Tax Purpose
View my other blog on Staff Bonus: Tax Deduction of Statutory Bonus Expenses: Definitive Analysis
Also see IRD v/s Pashupati Tube Mills that also provides the similar interpretation.
Gratuity Expenses as per Labor Act
Gratuity Expenses as per Labor Act
Defined Contribution Plan: Employer’s obligation is to contribute to the plan & actuarial and investment risk fall on employee. Accounted for as Service Cost and Contribution Payable.
Defined Benefit Plan: Employer’s obligation is to provide agreed benefits & actuarial and investment risk fall on employer. Accounted for as Plan Asset and Plan Liability.
Para 14 of IAS 26: Accounting and Reporting by Retirement Benefit Plans: Under a defined contribution plan, the amount of a participant’s future benefits is determined by the contributions paid by the employer, the participant, or both, and the operating efficiency and investment earnings of the fund. An employer’s obligation is usually discharged by contributions to the fund. An actuary’s advice is not normally required although such advice is sometimes used to estimate future benefits that may be achievable based on present contributions and varying levels of future contributions and investment earnings.
Labor Act 2048 (Defined Benefit Plan)
Labor Act 2048 had not defined employer’s contribution towards the Gratuity. It had only defined how Gratuity Plan should be. So, it is in the nature of Defined Benefit Plan. Rule 23 of the Labor Rules, 2050 had provided that any permanent employee who has served for 3 or more years and retires from service due to age bar or tendering resignation or is relieved from service of the enterprise due to any reason, such worker or employee shall be given lump sum gratuity at the following rate:
- An amount equivalent to 1/2 of the current monthly remuneration for every year of service rendered for the service of first 7 years,
- An amount equivalent to 2/3 of the current monthly remuneration which he was receiving lastly for every year of service rendered, to a worker or employee who has served between 7 to 15 years.
- An amount equivalent to a 1 month’s remuneration which he was receiving lastly for every year of service rendered, to a worker or employee, who has served for more than 15 years.
Labor Act 2074 (Defined Contribution Plan)
Labor Act 2074 has however defined employer’s contribution rate towards the Gratuity. So, it is in the nature of Defined Benefit Plan. Section 53 of the Labor Act 2074 provides that the employer shall deduct an amount equivalent to 8.33% of the basic remuneration of each employee each month and deposit it for the purpose of gratuity and such amount shall be deposited in the Social Security Fund in the name of the concerned employee with effect from the date on which the employee begins to work.
Recognition of Gratuity Liability under IFRS
At the outset it should be noted that IAS 37 Provisions, Contingent Assets and Contingent Liability doesn’t apply in the recognition of the liability under IAS 19 Employee Benefits. So, Gratuity Liability under Defined Benefit Plan or Defined Contribution Plan are recognized and measured under IAS 19 Employee Benefits.
This begs additional questions:
A. Are the management estimates actuarial valuations regarded as reliable measurement of the employee benefit liability?
B. Is the employee benefits liability recognized and measured under IAS 19 qualify to be recognized as liability under Income Tax Act?
Are the management estimates actuarial valuations regarded as reliable measurement of the employment benefit liability?
Para 60 of IAS 19: In some cases, estimates, averages and computational short cuts may provide a reliable approximation of the detailed computations illustrated in this Standard.
Para 59 of IAS 19: This Standard encourages, but does not require, an entity to involve a qualified actuary in the measurement of all material post-employment benefit obligations. For practical reasons, an entity may request a qualified actuary to carry out a detailed valuation of the obligation before the end of the reporting period. Nevertheless, the results of that valuation are updated for any material transactions and other material changes in circumstances (including changes in market prices and interest rates) up to the end of the reporting period.
So as per IAS not just professional actuarial valuations but even management estimates and averages are an reliable measurement of the employment related liabilities.
Does the employment benefits liability recognized and measured under IAS 19 qualify to be recognized as liability under Income Tax Act?
Let’s look at the tests for recognition of Liability under Income Tax Act:
Recognition test for Tax Accounts:
- There should be opposite entitlement and obligation as a result of “the other payment” being received
Yes, the company is not contractually / legally obliged to distribute such employment benefits. Further the company has received the opposite employment services from the employees and as a result “the other payment” has been received - The amount of the obligation can be quantified with reasonable accuracy
Yes
Conclusion: Yes, Recognize for Tax Purpose
But why isn’t Gratuity Liability related expense allowed for deduction in Tax?
Rule 23(3) of Labor Rules 2050 provided that any worker or employee who has been terminated from service pursuant to Section 52(4) or Section 54 of the Act shall not be entitled to receive gratuity.
The provision under Section 52(4) of the Labor Act, 2048 was related to the misconduct by the employee: (i) In case of any bodily harm or injury or fetters or detains to the proprietor, manager or employee of the enterprise with or without use of arms or injury or causes any violence or destruction or assault within the enterprise in connection with the labor dispute or on any other matter; (ii) in case steals the property of enterprise; (iii) remains absent in the enterprise more than a consecutive period of 30 days without notices; (iv) is imprisoned on being convicted on a criminal offence involving moral turpitude; (v) performs any activity with a motive of causing damage to secrecy relating to special technology of the Enterprise, Production Formula. Similarly, Section 54 of the Labor Act 2048, provided that the department of labor may impose any punishment to any worker or employee who causes violence illegally in the enterprise, other enterprises or in any government office, or directly or indirectly encourages others to do so. In these circumstances, the Laborer would not be eligible to receive the Gratuity entitled under Labor Act 2048.
However, such a restriction in receiving the Gratuity is not present in the current Labor Laws of Nepal; Labor Act 2074 and Labor Rules 2075.
Thus, the fact that Labor Act 2048 had the provision to manage Gratuity under a Defined Benefit Plan was not the reason why the Gratuity Liability maintained under Labor Act 2048 was not recognized for tax purposes as and when accrued. The reason for the non-recognition of the Gratuity Liability under Labor Act 2048 was due the presence of a likelihood that the employee could be disqualified / ineligible to receive the Gratuity benefits under Rule 23(3) of the Labor Rules, 2050 which could mean that: the employee could be far from having the “opposite entitlement” to the gratuity obligation of the employer.
The provision under Rule 23(3) of the Labor Rules, 2050 limited the virtual certainty of the gratuity liability tax authorities in Nepal has been treating this limitation of virtual certainty as a disqualifier for expense recognition for tax purpose.
Coming to the present Labor Laws; Labor Act 2074, the contribution by employer is also defined, it has to be deposited in approved fund and also because the employee who receive the gratuity under the Labor Act 2074 are now not limited to not receive the Gratuity by the disciplinary or other action of the law. This certainly is allowable for deduction in tax purpose.
Site Restoration / Asset Dismantling Cost
Provisions for dismantling cost of assets (usually capitalized in the value of assets) and restoration costs of environment, where there is obligation at present for dismantling or restoration. These provisions are discounted if the time value effect is material. These site restoration and asset dismantling cost are recognized for financial purposes as provision liability.
Recognition test for Tax Accounts:
- There should be opposite entitlement and obligation as a result of “the other payment” being received
Here there is not any opposite entitlement and obligation as a result as no “other payment” has been received. - The amount of the obligation can be quantified with reasonable accuracy
The amount may or may not be quantified with reasonable accuracy.
Conclusion: Not Recognize for Tax Purpose
Losses under an Onerous Contract
Providing for losses under an onerous contract. An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. If an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision. Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, a liability exists which is recognized as provision liability. Executory contracts that are not onerous fall outside the scope of this Standard.
Recognition test for Tax Accounts:
- There should be opposite entitlement and obligation as a result of “the other payment” being received
There is no opposite entitlement against such liability but rather an unavoidable loss under the onerous contract. Thus it is recognized as cost only when actual payment is made. - The amount of the obligation can be quantified with reasonable accuracy
Yes.
Conclusion: Not Recognize for Tax Purpose
Probable amount of legal claim that may arise
Providing for expenses on the likely/probable amount of legal claim that may arise due to past event/actions based on best estimate. Under IFRS, the amount recognized as a provision is the best estimate of the expenditure to be incurred. This is the amount that a company would rationally pay to settle the obligation, or to transfer it to a third party, at the end of the reporting period. Given the uncertainties inherent in determining an estimate, best estimates are based on management’s judgment of all possible outcomes and their financial effect, and should also factor in relevant past experience with similar transactions.
Recognition test for Tax Accounts:
- There should be opposite entitlement and obligation as a result of “the other payment” being received
There is no opposite obligation but rather an unavoidable loss under probable legal claim. Thus it is recognized as cost only when actual payment is made. - The amount of the obligation can be quantified with reasonable accuracy
The amount may or may not be quantified with reasonable accuracy.
Conclusion: Not Recognize for Tax Purpose