TITLE: PAS 37 Provisions, Contingent Liabilities & Contingent Assets DESCRIPTION: Overview This standard sets the criteria for recognition and measurement of provisions, contingent liabilities, contingent assets, and requires a number of disclosures about these items in order to understand them better. Scope Excludes provisions, contingent liabilities and contingent assets arising from [IAS 37, par.1-6]: financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments) non-onerous executory contracts insurance contracts (IFRS 4 Insurance Contracts), but IAS 37 does apply to other provisions, contingent liabilities and contingent assets of an insurer items covered by another IFRS. For example, IAS 11 Construction Contracts applies to obligations arising under such contracts; IAS 12 Income Taxes applies to obligations for current or deferred income taxes; IAS 17 Leases applies to lease obligations; and IAS 19 Employee Benefits applies to pension and other employee benefit obligations. CORE CONCEPTS: Definition [IAS 37, par.10] Provision: a liability of uncertain timing or amount. Liability: present obligation as a result of past events settlement is expected to result in an outflow of resources (payment) 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 Contingent asset: a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity. Recognition Provision [IAS 37, par.14]: There is a legal or constructive present obligation as a result of a past event, and The outflow of economic benefits to satisfy the obligation must be probable, and The amount of economic benefits required to satisfy the obligation must be reliably estimated. The amount of the provision should be the best estimate of the amount required to settle the obligation at the reporting date. If these conditions are not met, no provision shall be recognised. Specific provision: Restructuring provisions A provision for restructuring costs is recognised only when the general recognition criteria for provisions are met. A constructive obligation to restructure arises only when the entity [IAS 37, par.72]: o Has a detailed formal plan for restructuring with relevant information in it (about business, location, employees, time schedule and expenditures); and o Has valid expectation related to restructuring has been raised in the affected parties. A restructuring provision shall include only the direct expenditures arising from the restructuring that are both [IAS 37, par.80]: o Necessarily entailed by the restructuring; and o Not associated with the on-going activities of the entity. Future operating losses Provisions shall not be recognised for future operating losses (except for onerous contracts) [IAS 37, par.63]. An expectation that the entity may make future operating losses may be an indication that their assets have
been impaired, and an impairment review should be carried out in accordance with IAS 36 [IAS 37, par.65]. Onerous contracts An onerous contract is a contract in which unavoidable costs of fulfilling exceed the benefits from the contract [IAS 37, par.68]. If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision [IAS 37, par.66]. If the contract can be exited without paying compensation to the other party to the contract, then there is no obligation and no provision should be made [IAS 37, par.68]. Contingent liability: Not recognized [IAS 37, par.27], but are disclosed unless the possibility of an outflow of economic resources is remote [IAS 37, par.86]. Contingent asset: Not recognized [IAS 37, par.31], but are disclosed where an inflow of economic benefits is probable [IAS 37, par.89]. The entity should not reflect it anywhere in the financial statements if the likelihood of an inflow of economic benefit is merely possible or remote. The asset is not contingent and its recognition is appropriate when the realisation of income is virtually certain [IAS 37, par.33]. Measurement Provision: Measured at the best estimate of the expenditures required to satisfy the obligation at the end of the reporting period, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party [IAS 37, par.36]. This means: o Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount [IAS 37, par.40]. o Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value [IAS 37, par.39]. o 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 [IAS 37, par.45 and 37, par.47]. In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events [IAS 37, par.42].
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, 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 [IAS 37, par.53]. In measuring a provision consider future events as follows: o Forecast reasonable changes in applying existing technology [IAS 37, par.49] o Ignore possible gains on sale of assets [IAS 37, par.51] o Consider changes in legislation only if virtually certain to be enacted [IAS 37, par.50] Re-measurement of provisions [IAS 37,par.59] o Review and adjust provisions at each balance sheet date. o If an outflow no longer probable, provision is reversed. Presentation An entity is required to present provisions as a line item on the face of the balance sheet [IAS 1, par.54]. Disclosures: Provisions: For each class of provision, carrying amounts at the beginning and end of the period, additions, amounts used, unused amounts reversed and adjustments due to discount reversal or changes in the discount rate. Comparative information is not required [IAS 37, par.84]. A brief description of the obligation, timing and uncertainty of outflows and expected reimbursements including the amount of any asset recognized [IAS 37, par.85]. Contingent liabilities: Unless the possibility of any outflow is remote, an entity discloses, for each class of contingent liability, a brief description of the nature of the contingency and, where practicable, an estimate of its financial effect, the uncertainties relating to the amount and timing of any outflow and the possibility of any reimbursement [IAS 37, par.86]. Where any of the above information is not disclosed because it is impracticable that fact should be stated [IAS 37, par.91]. Contingent assets:
Where an inflow of economic benefits is probable an entity discloses a brief description of the nature of the contingent assets and where practicable an estimate of their financial effect [IAS 37, par.89]. Where any of the above information is not disclosed because it is impracticable that fact should be stated [IAS 37, par.91]. Seriously prejudicial exemption: In extremely rare cases disclosure of some or all of the above information may seriously prejudice the entity’s position in a dispute with other parties. IAS 37 allows an entity to omit the disclosures in such situations. However, the entity is then required to disclose the general nature of the dispute and the fact that the information has not been disclosed giving the reasons for the non-disclosure [IAS 37, par.92].
Summary: RECOGNITION
Provision
There is a legal or constructive present obligation as a result of a past event, and The outflow of economic benefits to satisfy the obligation must be probable, and The amount of economic benefits required to satisfy the obligation must be reliably estimated.
Contingent Asset
Not recognized.
Contingent Liability
Not recognized.
MEASUREMENT
PRESENTATION
Measured at the best estimate of the expenditures required to satisfy the obligation at the end of the reporting period
It is presented in the financial statements as a separate line item under the noncurrent assets with the account title Intangible Assets.
