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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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1. Provisions Dự phòng Definitions

Provisions
Legal obligation : An obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
= liability of uncertain timing or amount (c) other operation of law.

Nghĩa vụ hiện tại

= present obligation from past event outflow of benefits

legal obligation creates Constructive obligation

Nghĩa vụ pháp lý Nghĩa vụ cam kết

3

A constructive obligation: derives

from an entity’s actions where:

past practice, published policies

or a sufficiently specific current
statement,  the entity will
accept certain responsibilities;

the entity has created a valid

expectation on the part of those other
parties that it will discharge those
responsibilities.
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Provisions and other liabilities Provisions and other liabilities- EX

uncertainty about the timing or amount of the future settlement Obligations Provision Other Comments
Nợ phải trả còn lại liabilities
Warranties given for goods or v
Provisions other liabilities
services sold
Warranty,… >< (trade payables and accruals)
Refunds given for goods sold v
 Estimate  Certain timing or amount Discounts given for customer loyalty v
 Uncertain timing or schemes, such as frequent flyer
(agreed) programmes
amount  Sometimes, can estimate, , the Payments for damages connected v
uncertainty is generally much with legal cases that are probable.
less than for provisions. Dilapidations payable at the end of v
 Certain an operating lease
 Almost/ virtually certain
 Probable >50% Interest payments v Accrual - the service
 Possible has been received


Likely
Rarely
Nợ vay (chắc chắn phải 9
and the timing and
amount of payment10
 None
trả)=> Ko phải dự phòng is known

Từ probable trở lên là other liabilities

Từ probable trở xuống là provisions
Provisions and other liabilities- EX Distinguishing provisions from other liabilities
Obligations Provisi Other Comments
on liabilities
Holiday pay earned by v Short-term
Typical provisions are for:
employees compensated • Warranty
absences are Bảo hành
recognised in • Restoration Khôi phục mặt bằng
accordance with IAS
19. • Restructuring Tái cấu trúc
Property rentals v Accrual - the service • Onerous contracts. HĐ có rủi ro cao
has been received and
the timing and amount • Accruals and employee benefits are not
of payment is known
provisions under IAS 37 (IAS 19).28
Ordinary dividend v Recognise as a current
declared before year- financial liability
end 11 12

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When to recognize a provision AVOID the provision

When to recognize a provision? When to recognize a provision?

Present obligation Probable outflow Reliable estimate Can you avoid the obligation by your future action?
a past event is deemed to give probability occur is greater than
rise to a present obligation the probability that it will not
occur

Do not recognize a Recognize a provision

Are all conditions met? provision

Provision
Contingent liability or nothing

13 14
Training of personnel Warranty repairs

80% thua kiện

How to measure a provision

How to measure a provision?

50% thua kiện

Best estimate of expenditure to settle obligation

JUDGEMENT
PP theo trọng số PP xác suất cao nhất

Expected value Individual most likely outcome

-Risk uncertainties - Future events

-Present value (if material) - No gains from disposals of asset  Nghĩa vụ pháp lý hay cam kết?
 Những kết quả có thể xảy ra đối với sự kiện này?
Provisions shall be reviewed at the end of each reporting period
15 16
 PP trong số hay PP xác suất cao nhất?

An entity sells goods with a warranty under which customers are

covered for the cost of repairs of any manufacturing defects that
become apparent within the first six months after purchase.
+ If minor defects were detected in all products sold, repair
Ex 1 costs of 1 million would result.
+ If major defects were detected in all
products sold, repair costs of 4 million would result.
Provision

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Review Account for a provision

Debit Credit
Recognition Expense / Asset Liability Typical
of provision: (Provision for ...) provisions are
Unwinding Finance cost Liability for:
the discount (Provision for ...) • Warranty
• Restoration
Use of Liability Cash/bank etc
• Restructuring
provision: (Provision for ...) • Onerous
contracts.
Reimbursem Liability Expense
ents: ( Provision for ...)

20

Account for a provision

Recognition of Debit Credit

provision: Expense / Asset Liability (Provision for ...)

NO ↑ Finance cost

Change in
↑ Provision for ...
Provision ↑ estimate ?
↑ Expense
YES ↑ Provision for ...

Use of provision ↓ Provision for ...

↓ Cash
Provision ↓
↓ Provision for ...
22
Reimbursements: ↓ Expense

Ex 1
Provision

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EX 2
An entity sells goods with a warranty under which customers are covered
for the cost of repairs of any manufacturing defects that become apparent
within the first 3 years 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 second year, 50% of the goods sold will have no defects, 40% of
the goods sold will have minor defects and 10% of the goods sold will
have major defects.
 The third year, 30% of the goods sold will have no defects, 50% of the
goods sold will have minor defects and 20% of the goods sold will have
major defects.
The discount rate is: 10%. Use of provision in the first year is: 0,4 million.
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2. Other provision
Provision
(Lỗ kinh doanh dự đoán
(Hợp đồng có rủi ro cao) (Tái cấu trúc)
tương lai)
Future operating loss Onerous contracts Restructuring

LIABILITY

No provision

Impairment of asset ?

2. Other provision
Provision
(Lỗ kinh doanh) (Hợp đồng có rủi ro cao)

Future operating loss Onerous contracts Restructuring

Unavoidable cots > economic

benefits

a Provision

Lower of Net cost of fulfilling and Penalty

impairment losses on assets

dedicated to the onerous contract?

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2. Other provision Restructuring provision

Provision
(Tái cấu trúc)
Future operating loss Onerous contracts Restructuring
Program planned and controlled
by management that changes
scope or manner of business
EX: Sale or termination of line of
business, Relocation of business
activities, Reorganisation
Detail Valid
plan Expectation
Obligation (customers,
suppliers and employees)
• General recognition criteria of provision met
•Constructive obligation only when:
-Detailed formal plan identifying:
• business or part of business concerned
• Principal locations affected
• Location, function and approximate number of employees to
be compensated
• Expenditures to be incurred
• When the plan will be implement
AND
- Valid expectation created by starting to implement or announcing
plan to those affected

Restructuring provision

Restructuring costs – what to provide for?

Include if:
- Direct costs
- Unavoidable, and
- Not associated with
Ongoing activities
Exclude if:
- Retraining or relocating
continuing staff
- Marketing, or
- Investment in new system and
distribution network

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2. Other provision
Provision

Future operating loss Onerous contracts Restructuring

Program planned
and controlled by
Unavoidable cots > economic management that
LIABILITY benefits changes scope or
manner of business
EX: Sale or termination of
line of business, Relocation
of business activities,
No provision Reorganisation
a Provision
Lower of Net cost of
Impairment of asset ? Detail plan Valaid
fulfilling and Penalty
Expectation
impairment losses on assets
dedicated to the onerous
Obligation (customers,
contract?
suppliers and
employees)

Example CU Construction
obligation
P Ltd manufactures plastic products and has various plants across the P Ltd has decided to reallocate staff 60
to the nearest plant
country. P Ltd decides to shut down a plant as a result of poor
Some staff will be retrenched 40 X
performance Manufacturing assets will be moved 150
to other plants
P. Ltd has communicated the restructuring to Other assets will be sold (loss on 80
the employees (Construction obligation) sale)
The lease for the premises will be 125 X
terminated upon payment of a
penalty
P Ltd incurred consulting costs for 25
the restructuring
Restructuring provision

2. Contingent liability – contingent asset Note contingent asset

Contingencies
Contingent assets are not recognised in financial statements

Contingencies assets However, when the realisation of income is virtually certain, then
Contingencies liabilities
the related asset is not a contingent asset and its recognition is
appropriate.
Possible obligation Present obligation Possible asset
(do not meet the +
be confirmed by future
events, not wholly within
recognition criteria) Inflow is probable
the control of the entity

Outflow possible (not probable )

or not reliably measurable

Not recognized liabillty or asset,

DISCLOSURE REQUIRED

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provisions and contingent IAS 37- Provisions and contingencies

Uncertain in timing or amount Liability (CF)

Provision Contingent
Definition: liability
Definition:
 Present obligation  Liability Definition:
Provisions Contingent Past event Uncertain timing or amount  Possible obligation
Outflow of economic benefits Or
 arises from past events, Recognition:
 from past event  Present obligation as a
Present obligation
confirmed only by Recognition:
 Recognised a liability  Outflow probable result of a past event
But
uncertain future events, Outflow possible
 Reliably measurable Legal
entity doesn’t control Constructive
(<50%)
 not recognized liability or And/or
Outflow probable (>50%)
asset. It met, recognise in Amount reliable
Reliable estimate of
statement of financial estimate
 Disclosure. amount
position
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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3. Disclosures IAS 37- Decision tree

Present
For each class of the provision, an entity shall disclose: obligation as No (past event) No
Possible
the carrying amount at the beginning and the end of the period result of an Obligation?
obligating event?
additional provisions made in the period, including increases to
existing provision yes
amounts utilized during the period No (< 50%) No
Probable Remote?
> 50%
unused amounts reversed during the period outflows?
 the description of the nature of the obligation and the expected yes
timing of any resulting outcomes of economic benefits No (rare)
No
Reliable
estimate?

yes
Disclose Do
contingent nothing
Provide liability
Notes
Thu Hiền- Ngoc Thanh 2018 45 SFP: L

Contingent liabilities & assets Provisions and other liabilities

Characteristic Accounting treatment

uncertainty about the timing or amount of the future settlement
Asset virtually certain (>=90%) Assets (Statement of
Financial position)
Provisions other liabilities
Contingent Probable (>50%) Notes
asset
Warranty,… >< (trade payables and accruals)
Possible (>=10%) None
 Estimate  Certain timing or amount
Remote (<10%) None
 Uncertain timing or (agreed)
Liability Virtually certain Liabilities (Statement amount
of financial position)  Sometimes, can estimate, , the
uncertainty is generally much
Probable Liability less than for provisions.
Contingent probable, but not reliable Notes
liability Possible Notes
Remote None 47 48