IAS 37 Flashcards
definition of liability
present obligation as a result of past events settlement is expected to result in an outflow of resources (payment)
provision?
a liability of uncertain timing or amount.
contingent liability?
a possible obligation depending on whether some uncertain future event occurs,
or
a present obligation but payment is not probable or the amount cannot be measured reliably
recoginition of provision
An entity must recognise a provision if, and only if: [IAS 37.14]
a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
payment is probable (‘more likely than not’), and the amount can be estimated reliably.
when the obligating event is said to have occured
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation. [IAS 37.10]
A constructive obligation arises if past practice creates a valid expectation on the part of a third party,
disclosure of contingent liability
A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.
measurement of provision
Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount. [IAS 37.40]
Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value. [IAS 37.39]
Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
measurement of provision
Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount. [IAS 37.40]
Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value. [IAS 37.39]
Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party what should be the treatment?
the reimbursement should be recognised as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised should not exceed the amount of the provision.
if/when should the restructuring provision for following items be recognized:
sale or termination of a line of business closure of business locations changes in management structure fundamental reorganisations.
Sale of operation: recognise a provision only after a binding sale agreement [IAS 37.78]
Closure or reorganisation: recognise a provision only after a detailed formal plan is adopted and has started being implemented, or announced to those affected. A board decision of itself is insufficient.
Future operating losses: provisions are not recognised for future operating losses, even in a restructuring
Restructuring provision on acquisition: recognise a provision only if there is an obligation at acquisition date [IFRS 3.11]
