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IAS 37

To prescribe the criteria for recognition, measurement and

IAS 37 disclosure of

Provisions, Contingent Liabilities and

Contingent Assets
Provisions Contingent liabilities Contingent assets

issued in September 1998

1 July 1999

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Scope
Terms
• Applies to all enterprises in accounting for provisions, contingent
• A provision is a liability of uncertain timing or amount.
liabilities and contingent assets except those:
– A liability is a present obligation of the entity arising from past events, the
– resulting from financial instruments carried at fair value (IAS settlement of which is expected to result in an outflow of economic benefits
39) from the entity
• A contingent liability is:
– resulting from executorial contracts, unless they are onerous
– a possible obligation that arises from past events, whose existence will be
– arising in insurance enterprises from insurance contracts confirmed only by the occurrence of uncertain future event(s) not wholly
(IFRS 4) within the control of the entity, or
– A present obligation that arises from past events but it is not probable that
– covered by another IAS an outflow of economic benefits will be required to settle the obligation, or
the amount of obligation cannot be measured reliably.
• A contingent asset is: is a possible asset that arises from past events and
whose existence will be confirmed only by the occurrence of uncertain future
event(s) not wholly within the control of the entity

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1. Provisions Definitions

Legal obligation: An obligation that derives from:

(a) a contract (through its explicit or implicit terms);
Provisions (b) legislation; or
(c) other operation of law.

= liability of uncertain timing or amount A constructive obligation: derives from an entity’s actions where:
(a) past practice, published policies or a sufficiently specific current
statement, ➔ the entity will accept certain responsibilities;
= present obligation from past event outflow of benefits (b) as a result, the entity has created a valid expectation on the part of
those other parties that it will discharge those responsibilities.
legal obligation creates Constructive obligation

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Provisions and other liabilities

uncertainty about the timing or amount of the future settlement

Provisions other liabilities

Warranty,…
>< (trade payables and accruals)
✓ Estimate ✓ Certain timing or amount (agreed)
✓ Uncertain timing or amount
✓ Sometimes, can estimate, , the
uncertainty is generally much less
than for provisions.

EX: trade payables are liabilities to pay for goods or services that have been received
and have been invoiced or agreed with the supplier;

EX: accruals are liabilities to pay for goods or services that have been received but
have not been paid, invoiced or agreed with the supplier, including amounts due to
employees (for example, amounts relating to accrued vacation pay). Although it is
sometimes necessary to estimate the amount or timing of accruals, the uncertainty is
Thu Hiền- Ngoc Thanh 2018 9 generally much less than for provisions.
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Provisions and other liabilities- EX Provisions and other liabilities- EX

Obligations Provision Other Comments

Obligations Provision Other Comments liabilities
liabilities
Holiday pay earned by employees v Short-term
Warranties given for goods or services v
compensated
sold
absences are
Refunds given for goods sold v recognised in
Discounts given for customer loyalty v accordance with
schemes, such as frequent flyer IAS 19.
programmes
Payments for damages connected with v Property rentals v Accrual - the service
legal cases that are probable. has been received
and the timing and
Dilapidations payable at the end of an v amount of payment
operating lease is known
Interest payments v Accrual - the service Ordinary dividend declared before year- v Recognise as a
has been received and end current financial
the timing and liability
amount of payment is
known
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Distinguishing provisions from other liabilities When to recognize a provision

Typical provisions are for: When to recognize a provision?

• Warranty
• Restoration
• Restructuring
Present obligation Probable outflow Reliable estimate
• Onerous contracts. a past event is deemed to give probability occur is greater than
• Accruals and employee benefits are not rise to a present obligation the probability that it will not
occur
provisions under IAS 37 (IAS 19).

Are all conditions met?

Provision
Contingent liability or nothing

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AVOID the provision How to measure a provision

When to recognize a provision? How to measure a provision?

The amount of provision= best estimate of expenditure required

to settle the present obligation at the end of the reporting period.
Can you avoid the obligation by your future action?
JUDGEMENT

Do not recognize a Recognize a provision Expected value Individual most likely outcome
provision

-Risk uncertainties - Future events

EX -Present value (if material) - No gains from disposals of asset

Training of personnel Warranty repairs

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end of2018
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How to measure a provision

Best estimate
• Expected value: Where the provision involves a large
population of items, the obligation is estimated by weighting
all possible outcomes by their associated probabilities. For
example: warranties, refund…
• Individual most likely outcome: Where a single obligation is
being measured, the individual most likely outcome may be
the best estimate of the liability. For example: Restructuring
obligation, Decommissioning cost…
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Best estimate_Example
• An entity sells goods with a warranty within the first six
months after purchase.
• If minor defects were detected in all products sold, repair
costs of 1 million would result. If major defects were detected
in all products sold, repair costs of 4 million would result.
The entity’s past experience and future expectations indicate
that, for the
coming year, 75 per cent of the goods sold will have no
defects, 20 per cent of the goods sold will have minor defects
and 5 per cent of the goods sold will have major defects.
• The expected value of the cost of repairs is:
(75% of nil) + (20% of 1m) + (5% of 4m) = 400,000
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Account for a provision

Best estimate_Example
• An employee was injured at work in 20X8 due to faulty Debit Credit
equipment and is suing Rey Co. Rey Co’s lawyers have Recognition of Expense / asset Liability – Provision
advised that it is probable that the entity will be found provision:
liable. Rey Co has received legal advice that the most Unwingding the discount Finance cost Liability – Provision
likely outcome of the court case from the employee is
that they will lose the case. The legal team think there is Use of provision: Liability - Cash/bank etc
an 80% chance of having to pay $10m; 10% chance of provision
having to pay $12m, and a 10% chance of paying Reimbursements: Liability - Provision Expense
nothing.
• Best estimate of the provision for the court case is $10m,
being the most likely outcome.

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Provision_special issues Provision_special issues

Reimbursement Reimbursement_example

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Provision_special issues
Provision_special issues
Time value of money_unwinding the discount
Reimbursement_example
• If the time value of money is material (payable in
1 year or more), the provision should be
discounted to present value initially.
• Subsequently, the discount on this provision
would be unwound over time, to record the
provision at the actual amount payable.
• The unwinding of this discount would be
recorded in the statement of profit or loss as a
finance cost.

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Provision_special issues
Provision_special issues
Time value of money_unwinding the discount_Example Provision

• At 31 December 20X8, the legal advisors of Rey Co now believe

that the $10m payment from the court case would be payable in one Future operating loss Onerous contracts Restructuring
year. Rey Co has a cost of capital of 10%.
Program planned
Provision on 31 December 20X8: and controlled by
DR Expense: $9.09m Unavoidable cots > economic management that
LIABILITY benefits changes scope or
CR provision_liability: $9.09m ($10m/1.10)
manner of business
• By 31 December 20X9, unwinding the discount
EX: Sale or termination of
DR finance cost: $ 0.91m ($9.09m x 10%) line of business, Relocation
of business activities,
CR provision_ liability: $ 0.91m
No provision a Provision Reorganisation
When Rey Co make the payment Lower of Net cost of
Impairment of asset ? Detail plan Valaid
DR provision_liability: $10m ($9.09m+$0.91m) fulfilling and Penalty
Expectation
CR Cash: $10m impairment losses on assets
dedicated to the onerous
Obligation (customers,
contract?
suppliers and
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employees)

Provision_special issues Provision_special issues

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Provision_special issues
Restructuring cost
• Restructuring
– Sale/termination of a line of business;
– closure of business locations in a country or region
– relocationof business activities from one country or region
to another;
– changes in management structure, for example,
eliminating a layer of management; and
fundamental reorganisations that have a material effect on
the nature and focus of the entity’s operations
• Whether an obligation exists?
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• What to provide for? Thu Hiền- Ngoc Thanh 2018 30

Provision_special issues
Restructuring provision
Restructuring cost _whether an obligation exists?
• General recognition criteria of provision met Restructuring costs – what to provide for?
•Constructive obligation only when:
Include if: Exclude if:
-Detailed formal plan identifying: -Direct costs -Retraining or relocating
• business or part of business concerned -Unavoidable, and continuing staff
• Principal locations affected -Not associated with -Marketing, or
• Location, function and approximate number of Ongoing activities -Investment in new
employees to be compensated system and distribution
• Expenditures to be incurred network
• When the plan will be implement
AND
- Valid expectation created by starting to implement or
announcing plan to those affected
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Restructuring provision Restructuring provision

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Restructuring provision Example Restructuring provision Example

• P Ltd manufactures plastic products and has various plants across the
What amount do we recognise as a restructuring provision?
country
•P Ltd decides to shut down a plant as a result of poor performance
•P Ltd has decided to reallocate staff to the nearest plant (CU 60), but 1. 165 (40+125)
some staff will be retrenched (CU 40) 2. 190 (40+125+25)
•Manufacturing assets will be moved to other plants (CU 150)
• Other assets will be sold (loss on sale = CU 80) 3. 250 (40+60+125+25)
•The lease for the premises will be terminated upon payment of a 4. 375 (40+125+150)
penalty (CU 125) 5. 480 (40+60+125+25+60+150+80)
•P Ltd incurred consulting costs for the restructuring (CU 25)
•P. Ltd has communicated the restructuring to the employees
(Construction obligation)

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2. Contingent liability – contingent asset Note contingent asset

Contingencies Contingent assets are not recognised in financial statements

However, when the realisation of income is virtually certain, then the

Contingencies liabilities Contingencies assets
related asset is not a contingent asset and its recognition is appropriate.

Possible obligation Present obligation Possible asset

be confirmed by future (do not meet the
events, not wholly recognition criteria) +
within the control of Inflow is probable
the entity
Outflow possible (not probable )
or not reliably measurable

Not recognized liabillty or asset,

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DISCLOSURE REQUIRED

IAS 37- Provisions and contingencies 3. Disclosures

Liability (CF)
Definition:
✓ Present obligation
✓Past event
✓Outflow of economic benefits
Recognition:
✓ Outflow probable
✓ Reliably measurable
It met, recognise in
statement of financial
position
For each class of the provision, an entity shall disclose:
Contingent ❑the carrying amount at the beginning and the end of the period
Provision
liability ❑additional provisions made in the period, including increases to
Definition:
✓ Liability Definition:
existing provision
✓Uncertain timing or amount ✓ Possible obligation ❑amounts utilized during the period
Or
Recognition:
✓Present obligation ❑unused amounts reversed during the period
✓ Present obligation as a
result of a past event
But ❑ the description of the nature of the obligation and the expected
✓Outflow possible
✓Legal timing of any resulting outcomes of economic benefits
(<50%)
✓Constructive
And/or
✓Outflow probable (>50%)
✓Amount reliable
✓Reliable estimate of
estimate
amount
It as above, No recognise in
It met, recognise in
statement of financial
statement of financial
position
position
Instead, disclosure provided.
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IAS 37- Decision tree Contingent liabilities & assets

Present
obligation as No (past event) Possible No
Characteristic Accounting treatment
result of an Obligation?
obligating event? Asset virtually certain (>=90%) Assets (Statement of
Financial position)
yes
No (< 50%) No Contingent Probable (>50%) Notes
Probable Remote? asset
> 50% Possible (>=10%) None
outflows?
yes Remote (<10%) None
No (rare) Liability Virtually certain Liabilities (Statement
Reliable No
estimate?
of financial position)
Probable Liability
yes
Disclose Do
contingent Contingent probable, but not reliable Notes
Provide nothing liability
liability Possible Notes
Notes
SFP: L Thu Hiền- Ngoc Thanh 2018 41
Remote Thu Hiền- Ngoc Thanh 2018 None 42

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