IAS37 - Provisions, Contingent Liabilities and Contingent Assets Flashcards
Types of provisions covered by IAS 37:
- Accruals
- Payables
Provisions covered by other standards:
- Income taxes
- Leases
- Employee benefits
A provision is different from an accrual. What is an accrual:
An accrual is a liability tonpay for goods or services that have been received or supplied, but have not been invoiced or paid.
What is a provision under IAS37:
A liability of uncertain timing or amount.
What does a contingent provision mean:
It means it’s uncertain in timing or amount.
Contingent = unforeseen, depending on the circumstances
Criteria for provisions to be included in the finanacial statements:
- A present obligation (legal or constructive) has arisen as a result of a past event.
- It is probable that it will be paid.
- The amount can be estimated reliably.
What is an obligating event:
An event that creates a legal or constructive obligation leaving an entity with no alternative but to settle that obligation.
What is a constructive obligation:
This is when an entity accepts certain responsibilities, because of an established pattern of past practice.
Probable outflow =
When it is considered to be more than 50% chance that there will a settlement required.
Reliable estimate =
- A reliable estimate to settle the present obligation at the reporting date.
- For groups of events, a probability-expected value should be used.
- If the provision is for a future obligation, the Present Value of the amount should be used.
How to record a Provision:
Dr. Expense
Cr. Provision
The provision should be reversed if the economic benefit is no longer probable.
Provisions are usually non-current liabilities.
Examples of Provisions:
- Future Major Repairs
- Warranties
- Penalties
- Clean-up costs for unlawful environmental damage.
- Decommissioning costs of an oil installation or a nuclear power station (rectify damage caused).
What events are recognised as provisions:
Past events that exist independently of an entity’s future actions.
What is an onerous contract:
When the unavoidable costs of meeting the obligation exceed the economic benefits expected to be received under it.
The cost to be recognised in the accounts is the lowest of the cost of fulfilling the contract versus any penalty due of the contract does not get fulfilled.
Restructuring costs as provisions:
These need to be included if there is a formal detailed plan available (= Constructive obligation).
Just a management decision won’t be enough. There must be a plan with the intention to announce it to those affected.
What happens if the criteria for recognising a provision have not been met:
There is a potential for a contingent liability to be recognised.
What is a contingent liability according to IAS 37:
- A possible obligation that arises from past events, whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events that are not wholly within the entity’s control.
- A failed provision (for example an obligation exists, but it is not probable that economic benefit will flow, or the amount of the obligation cannot be measured reliably.
Probable means more than 50% likely.
Are contingent liabilities recognised?
No, they are disclosed instead.
What are contingent assets:
They usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefit to the entity.
For example a legal claim that is being pursuit by the entity, which may lead to an inflow of economic benefit.
Contingent assets are not recognised, they are disclosed.
Once the realisation of income is virtually certain, the asset is no longer a contingent asset and its recognition is appropriate.
See IAS 37 Conclusion in FLP Course:
For summary of this IAS.
When is a contingent asset recorded:
When the economic inflow is probable (more than 50% likely).
Disclosure only, no recognition.
When is a provision recognised:
If there is a present obligation (legal or constructive)
When is a contingent liability recorded:
When the event is possible, but not probable yet.
