A. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
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
Provision: A liability of UNCERTAIN timing and amount
Recognise when:
Entity has a present obligation (legal or constructive) as a result of a past
event;
Probable that an outflow of resources embodying economic benefits to settle
the obligation
Reliable estimate of amount of the obligation
If any of these conditions NOT recognised, then provision not recognised
Present Obligation:
Legal obligation:
. a contract
. legislation
. or other operation of law
Constructive obligation:
. an established pattern of past practice, published policies, specific current
statement indicating to other parties it will accept certain responsibilities
. Entity creates expectation on the part of those other parties that it will
discharge those responsibilities
. If more likely that there is no present obligation at end of reporting period –
recognise as contingent liability
Outflow of resources
. Only recognise provision if it is probable that an outflow of economic
benefits will be required to settle the obligation
. Probable – ‘more likely than not’
. If probable outflow is remote, recognise as contingent liability
If provision relates to a large population of items: Statistical methods of
estimation –– use expected value
If provision relates to one or small population of items: Use most ‘likely
outcome’
Disclosure – Provisions:
A brief description of the nature of the obligation, and the expected timing of
any resulting transfers of economic benefits
Numbers to be disclosed
Carrying amount at beginning and end of period
Additional provisions made in the period, including increases in existing
provisions
Amounts used during the period
Amounts reversed during the period
Future operating losses: Provision should be recognised only if the obligation
in question exists independently of entity’s future actions
, Onerous contracts: A contact “in which the unavoidable costs of meeting the
obligations under the contact exceed the economic benefits to be received
under it”
Recognise present obligation as a result of contract
Under IAS 37, the following are examples of events that may fall under the
definition of restructuring:
. sale or termination of a line of business
. the closure of business locations in a country or region or the relocation of
business activities from one country or region to another
. changes in management structure, for example, eliminating a layer of
management; and
. fundamental reorganisations that have a material effect on the nature and
focus of the entity’s operations.
Contingent liabilities:
A present obligation that arises from past events but is not recognised
because:
. the amount of the obligation cannot be measured with sufficient reliability
or
. It is not probable that an outflow of economic benefits will be required to
settle the obligation
. A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity
Disclosure of contingent liabilities
. A contingent liability is not recognised in the statement of financial position,
but it is disclosed as follows:
. a brief description of its nature
. an estimate of its financial effect
. an indication of the uncertainties relating to the amount or timing of
outflow
. the possibility of any reimbursement
Contingent asset: “A possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity”
Events after the reporting period: Are those events, both favourable and non-
favourable, which occur between the end of the reporting period and the
date on which the financial statements are authorised for issue by the
directors
Date of Authorisation for issue:
IAS 10 requires date to be disclosed
Identity of who gave the authorisation
Whether owners or others have power to amend financial statements after
issue
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
Provision: A liability of UNCERTAIN timing and amount
Recognise when:
Entity has a present obligation (legal or constructive) as a result of a past
event;
Probable that an outflow of resources embodying economic benefits to settle
the obligation
Reliable estimate of amount of the obligation
If any of these conditions NOT recognised, then provision not recognised
Present Obligation:
Legal obligation:
. a contract
. legislation
. or other operation of law
Constructive obligation:
. an established pattern of past practice, published policies, specific current
statement indicating to other parties it will accept certain responsibilities
. Entity creates expectation on the part of those other parties that it will
discharge those responsibilities
. If more likely that there is no present obligation at end of reporting period –
recognise as contingent liability
Outflow of resources
. Only recognise provision if it is probable that an outflow of economic
benefits will be required to settle the obligation
. Probable – ‘more likely than not’
. If probable outflow is remote, recognise as contingent liability
If provision relates to a large population of items: Statistical methods of
estimation –– use expected value
If provision relates to one or small population of items: Use most ‘likely
outcome’
Disclosure – Provisions:
A brief description of the nature of the obligation, and the expected timing of
any resulting transfers of economic benefits
Numbers to be disclosed
Carrying amount at beginning and end of period
Additional provisions made in the period, including increases in existing
provisions
Amounts used during the period
Amounts reversed during the period
Future operating losses: Provision should be recognised only if the obligation
in question exists independently of entity’s future actions
, Onerous contracts: A contact “in which the unavoidable costs of meeting the
obligations under the contact exceed the economic benefits to be received
under it”
Recognise present obligation as a result of contract
Under IAS 37, the following are examples of events that may fall under the
definition of restructuring:
. sale or termination of a line of business
. the closure of business locations in a country or region or the relocation of
business activities from one country or region to another
. changes in management structure, for example, eliminating a layer of
management; and
. fundamental reorganisations that have a material effect on the nature and
focus of the entity’s operations.
Contingent liabilities:
A present obligation that arises from past events but is not recognised
because:
. the amount of the obligation cannot be measured with sufficient reliability
or
. It is not probable that an outflow of economic benefits will be required to
settle the obligation
. A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity
Disclosure of contingent liabilities
. A contingent liability is not recognised in the statement of financial position,
but it is disclosed as follows:
. a brief description of its nature
. an estimate of its financial effect
. an indication of the uncertainties relating to the amount or timing of
outflow
. the possibility of any reimbursement
Contingent asset: “A possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity”
Events after the reporting period: Are those events, both favourable and non-
favourable, which occur between the end of the reporting period and the
date on which the financial statements are authorised for issue by the
directors
Date of Authorisation for issue:
IAS 10 requires date to be disclosed
Identity of who gave the authorisation
Whether owners or others have power to amend financial statements after
issue
