PAS 37 Provisions, Contingent

Liabilities and Contingent Assets

2020 Edition

Lecture Aid

By: Zeus Vernon B. Millan

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Provisions
• A provision is a liability of uncertain timing or amount.
• Provisions differ from other liabilities because of the
uncertainty about the timing or amount of expenditure
required in settlement. Unlike for other liabilities, provisions
must be estimated. Although, some other liabilities are also
estimated, their uncertainty is generally much less than for
provisions.
• Other liabilities, such as accruals, are reported as part of
“Trade and other payables” whereas provisions are reported
separately.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Recognition of provisions

Provisions are presented in the statement of financial position

separately from other types of liabilities. A provision is recognized
when all of the following conditions are met:
1. The entity has a present obligation (legal or constructive) as a
result of a past event;
2. It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Provision vs. Contingent liability

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Standards (by: Zeus Vernon B. Millan)
 Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
Measurement

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Standards (by: Zeus Vernon B. Millan)
Present value
• If the effect of the time value of money is material, the
amount of a provision shall be the present value of the
expenditures expected to be required to settle the
obligation.

Expected disposal of assets

• Gains from the expected disposal of assets shall not be
taken into account in measuring a provision. Gains shall
be recognized separately and only when the assets are
actually disposed of.
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
 Reimbursements
• Where some or all of the expenditure required in settling a provision
is expected to be reimbursed by another party, the reimbursement is
recognized only when it is virtually certain that reimbursement
will be received if the entity settles the obligation.

Provision for / Expense 100,000

Payable to Company A 100,000

• The reimbursement shall be treated as a separate asset.

Receivable from Company B 75,000

Other income from... 75,000

• In the statement of profit or loss and other comprehensive income,

the expense relating to a provision may be presented net of the
amount recognized for a reimbursement.
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
Changes in provisions

• Provisions shall be reviewed at the end of each reporting

period and adjusted to reflect the current best estimate.

• If it is no longer probable that an outflow of resources

embodying economic benefits will be required to settle
the obligation, the provision shall be reversed.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Product warranties and guarantees

• If a customer has the option to purchase a warranty

separately (for example, because the warranty is priced or
negotiated separately), the warranty is accounted for in accordance
with PFRS 15 Revenue from Contracts with Customers.

• If a customer does not have the option to purchase a warranty

separately, the warranty is accounted for in accordance with PAS 37
Provisions, Contingent Liabilities and Contingent Assets unless the
promised warranty provides the customer with a service in addition
to the assurance that the product complies with agreed-upon
specifications.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Liability for premiums

• A customer’s option to acquire additional goods or

services for free or at a discount is accounted for under
PFRS 15 if the option provides the customer a
material right that the customer would not receive
without entering into that contract.
• A customer option that does not provide the customer
with a material right is not accounted for under PFRS 15;
and therefore, accounted for in accordance with PAS 37.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Guarantee for indebtedness of others

• A provision for the guarantee for indebtedness of others

is recognized when it becomes probable that the entity
will be held liable for the guarantee, such as when the
original debtor defaults on the loan.
Example:
Company A has a loan of P2,000,000 to RCBC
Company B is the guarantor of the loan of Company A

If Company A defaults on the loan payment, Company B will only

recognize a liability to RCBC when the Bank already exhausted
the assets of Company A and still the loan cannot be fully offset
from the assets of Company A.

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Standards (by: Zeus Vernon B. Millan)
Contingent assets

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Standards (by: Zeus Vernon B. Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 1: MULTIPLE CHOICE

PROBLEM 2: MULTIPLE CHOICE

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 END
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