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CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
PAS 37
1

PAS 37 Provisions, Contingent Liabilities and

Contingent Assets
Learning Competencies

• State the recognition criteria for provisions.

• Differentiate the accounting requirements
for a provision, a contingent liability and a
contingent asset.
• Describe the measurement of a provision.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)

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.

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Standards (by: Zeus Vernon B. Millan)

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Provision vs. Contingent liability

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Standards (by: Zeus Vernon B. Millan)

Recognition of provisions

• 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.

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Standards (by: Zeus Vernon B. Millan)

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Measurement

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Standards (by: Zeus Vernon B. Millan)

Present value

• Where 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.

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Standards (by: Zeus Vernon B. Millan)

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 only when the assets are actually disposed
of.

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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.
• The reimbursement shall be treated as a separate asset.
• 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.

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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.

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Standards (by: Zeus Vernon B. Millan)

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Liability for premiums

• A customer 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.

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Standards (by: Zeus Vernon B. Millan)

Contingent assets

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APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

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 QUESTIONS????
 REACTIONS!!!!!

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Standards (by: Zeus Vernon B. Millan)

END
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