Group 8

Prepared by:
Predilla, Michelle Chyka
Ramirez, Christine Marie
Ramos, Aira
Roman, Mylene
 What does ILO 8 discusses?
Accounting for Provisions
Revenue Contracts and Contracts with Customers
Government Grants and Disclosure of Government Assistance

It includes the recognition, measurement,

presentation and disclosure in the financial statements.

Also the standards and procedures to account and record these topics.
 LEARNING OBJECTIVES

1. Define the provision, revenue contracts.

2. Understand the recognition, measurement, presentation and disclosure in the

financial statements

3. Explain the application of accounting principles for provision and revenue

contracts

4. Differentiate between government grants and disclosure of government

assistance
 INTRODUCTION

PAS 37
Prescribes the accounting and disclosure requirements for provisions, contingent liabilities,
and contingent assets to help users understand their nature, timing, and amount.

PAS 37 applies to the accounting for provisions, contingent liabilities, and contingent
assets, except those arising from executory contracts, unless they are onerous, and
those that are covered by the PFRSs.

Executory Contracts are contracts that are not yet fully executed, meaning, the
parties thereto still have obligations to perform.
Onerous means burdensome. A contract become onerous when the cost of
fulfilling it exceeds the economic benefits expected to be derived from it.
DEFINITION OF
LIABILITY
A liability is a present obligation of an entity to transfer an
economic resource as a result of past event.

Obligation is a duty or responsibility that an entity has no

practical ability to avoid.

Liability is classified as current and noncurrent.

PROVISIONS
 A provision is an existing liability of uncertain timing or uncertain amount.
Provisions are actually estimated liability because it is both probable and measurable.
RECOGNITION OF
PROVISION
 RECOGNITION OF PROVISION

A provision is recognized when:

A. An entity has a present obligation (legal or constructive) as a result of past

event;

B. It is probable that an outflow of resources embodying economic benefits will

be required to settle obligation.

C. A reliable estimate can be made of the amount of the obligation.

 OBLIGATING EVENT
gives rise to a present obligation and an event that creates a legal
or constructive obligation because the entity has no realistic
alternative but to settle the obligation created by the event.
 LEGAL OBLIGATION
is an obligation arising from a contract, legislation or
other operation of law.
 CONSTRUCTIVE OBLIGATION
is an obligation that derives from an entity’s actions where:

• The entity has indicated to other parties (by a pattern of past practice,
published policies or a current statement) that it will accept certain
responsibilities; and

• As a result, the entity has created in the other parties a valid

expectation it will discharge those responsibilities.
 PROVISIONS

Entity has present obligation as a Probable outflow/ transfer of Amount of obligation is

result of a past event economic benefit measured reliably

Obligating Event REMOTE = less It must be RELIABLY

than 10% likely to ESTIMATED
occur or very slight
Present  When no reliable
accurate
Obligation estimate can be made,
no provision is
POSSIBLE = less
recognized.
than 50% likely to
occur
Legal Constructive
Obligation Obligation PROBABLE = more
NOTE BENE:
 Involves contract,  Obligation indicated than 50% likely to !!! If all of these conditions
legislation, and to other party that occur are not met, no provision
other operations of
the law.
will result to valid
expectation
shall be recognized !!!
EXAMPLES OF PROVISIONS

Examples of Provisions are as follows:

1. Warranties
2. Environment Contamination
3. Decommissioning or Abandonment Costs
4. Court Case
5. Guarantee
 PRO-FORMA JOURNAL ENTRY FOR PROVISION

Expense xx
Estimated liability xx
To record the recognition of a provision
CONTINGENT
LIABILITY
 CONTINGENT LIABILITY

A. Possible obligation arising from past events whose existence will be confirmed
only by the occurrence or non-occurrence of some uncertain future event not
wholly within the entity’s control, or

B. Present obligation that arises from a past event but is not recognized because
either:
(i) it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
 TREATMENT OF CONTINGENT LIABILITY

A contingent liability shall not be recognized in the financial statements but shall be
disclosed only. The required disclosures are:

a. Brief description of the nature of the contingent liability.

b. An estimate of its financial effects.
c. An indication of the uncertainties that exists.
d. Possibility of reimbursements.

If a contingent liability is remote, no disclosure is necessary.

 CONTINGENT LIABILITY

Possible Obligation Present Obligation

 Arises from past event  Arises from past event

Existence is uncertain
 Existence No probable outflow Obligation cannot be
will be
of resources. measured reliably.
confirmed only by the
concurrence or
nonconcurrence of an
uncertain future event.

Contingent Liability shall not be recognized in the financial statements but shall be disclosed only.
 The required disclosures are:  Disclosure is not necessary if contingent
a. Brief description of the nature of the contingent liability. liability is remote.
b. An estimate of its financial effects.
REMOTE = less than 10% POSSIBLE = less than
c. An indication of the uncertainties that exists. likely to occur or very slight
d. Possibility of reimbursements. 50% likely to occur
accurate
 RELATIONSHIP
BETWEEN PROVISION
AND CONTINGENT
LIABILITY
 Relationship between provision and contingent liability

In general sense, all provisions are contingent because they are uncertain
in timing or amount. The term “contingent” is used for items that are not
recognized because their existence will be confirmed by occurrence or
non-occurrence of one or more uncertain future events not within the
control of the entity.

The “contingent liability” is used for liabilities that do not meet the
recognition criteria.
RELATIONSHIP BETWEEN PROVISIONS AND CONTINGENT LIABILITY

PROVISIONS CONTINGENT LIABILITY

Possible Present
Present
Obligation Obligation
Obligation
OR
PROBABLE MEASURABLE
PROBABLE AND MEASURABLE
 Obligation must EITHER be
 Obligation must BOTH be probable OR measurable.
probable AND measurable.
 SPECIFIC
APPLICATIONS
 No provision should be made for future

1
operating losses, including those relating to a
restructuring, as they do not meet the definition
of a liability at the end of the financial
reporting period.
Provisions should be made for onerous contracts, being contracts where the unavoidable future costs under the contract exceed the
future economic benefits (e.g. a leased property sub-let at a lower rent).

2
3 A restructuring is a sale or termination of a line of business, closure of business locations, changes in management structure or a fundamental re-organization of the company. No obligation
arises for
binding sale agreement.
the sale of an operation until there is a
A provision for restructuring costs is recognized only
when the general recognition criteria are met. More
specifically, a constructive obligation only arises when

4
a detailed formal plan is in place and it has begun or
been announced to those affected by it. A board
decision is not enough. Restructuring provisions
should include only direct expenditures caused by the
restructuring, not costs that associated with the
ongoing activities of the entity.
A provision for restructuring costs is recognized only
when the general recognition criteria are met. More
specifically, a constructive obligation only arises when

4
a detailed formal plan is in place and it has begun or
been announced to those affected by it. A board
decision is not enough. Restructuring provisions
should include only direct expenditures caused by the
restructuring, not costs that associated with the
ongoing activities of the entity.
MEASUREMENT OF
PROVISIONS
 MEASUREMENT OF PROVISION

The amount recognized as a provision should

be the BEST ESTIMATE of the expenditure
required to settle the present obligation at the
financial reporting date.
 CONSIDERATION IN DETERMINING BEST ESTIMATE

1 Risks and uncertainties that

surround the underlying events.
Future events

A. Forecast reasonable changes in

2
applying existing technology
B. Ignore possible gains on sale of
assets
C. Consider changes in legislation
only if virtually certain to be
enacted
 Discounted present value using a pre-tax

3
discount rate that reflects the current market
assessments of the value of money and the risks
specific to the liability.
Reimbursement by another party.

4
5 Gains on expected disposal of assets.
Presence of onerous contact
6
7 Re-measurement of provisions

A. Review and adjust provisions at

each reporting date.
B. If an outflow no longer
probable, provision is reversed.
Use of provisions
8
 REVENUE CONTRACTS

IFRS 15 applies to all contracts with customers

except:

Leases within the scope of IAS 17.

Financial instruments and other contractual
rights and obligations within the scope of IFRS
9, IFRS 10, IFRS11, IAS 27 or IAS 28.
 IFRS 15 applies to all contracts with customers except:

Insurance contracts within the scope of IFRS 4

Insurance Contracts
Nonmonetary exchanges between entities in the
same line of business.
A contract with a customer may
be partially within the scope of
IFRS 15 and partially within the
scope of another standard.
A. If other standards specify how to separate and/or
initially measure one or more parts of the contract,
then those separation and measurement requirements
are applied first. The transaction price is then reduced
by the amounts that are initially measured under other
standards;
B. If no other standard provides guidance on how to
separate and/or initially measure one or more parts of
the contract, then IFRS 15 will be applied.
Contract an agreement between two or more parties
that creates enforceable rights and obligations
 “Contract “
an agreement between two or more parties that creates
enforceable rights and obligations
 “Customer“
a party that has contracted with an entity to
obtain goods or services that are an output of
the entity’s ordinary activities in exchange for
consideration
 “Income”
increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in an increase in equity, other than those
relating to contributions from equity participants
 “Performance obligation”
a promise in a contract with a customer to transfer to
the customer either a good or service (or a bundle of
goods or services) that is distinct; or a series of
distinct goods or services that are substantially the
same and that have the same pattern of transfer to the
customer.
 “Revenue”
income arising in the course of an entity’s
ordinary activities.
 “Transaction price”
the amount of consideration to which an entity
expects to be entitled in exchange for transferring
promised goods or services to a customer,
excluding amounts collected on behalf of third
parties.
 THE FIVE-STEP MODEL

04
02
Allocate the
Identify the separate
transaction price to
performance
the performance
obligations
obligations

04
01 03 Recognize revenue
Identify the contract Determine the when (or as)
with the customer transaction price performance is
satisfied
Revenue from Contracts
with Customers
 COMMON TYPES OF TRANSACTION

02 04
Principal Versus Consignment
Agent Arrangement

03
01
Repurchase
Warranties 05
Agreements
Bill and Hold
Arrangement
 1. WARRANTIES

In consultation with Merriam Webster Dictionary,

"warranty is a written statement that promises the good
condition of a product and states that the maker is
responsible for repairing or replacing the product usually
for a certain period of time after its purchase".
 1. WARRANTIES

• If a customer has the option to purchase a warranty

separately from the product to which it relates, it
constitutes a distinct service and is accounted for as a
separate performance obligation.
• If the customer does not have the option to purchase the
warranty separately, for instance if the warranty is
required by law, that does not give rise to a performance
obligation and the warranty is accounted for in
accordance with IAS 37.
 2. PRINCIPAL VERSUS AGENT

An entity must establish in any transaction whether it is a principal or agent.

A).\Principal. It is a principal if it controls the promised good or service before

it is transferred to the customer.

B). Agent. It is acting as agent if its performance obligation is to arrange for

the provision of goods and services by another party.
 2. PRINCIPAL VERSUS AGENT
(Principal) Example :
Suppose that the suppliers
don't need another party to
arrange the transactions with
their customers, whereby,
suppliers have their own
websites, and the suppliers
also take the responsibility of
delivering their products or
services directly to their
customers.  transaction.
(Agent) Example :
An entity operates a website.
A website is for the
arrangements of transactions
between the suppliers and
customers. The website also
takes the responsibility of
facilitating the payments.
Besides, it receives a 10%
commission to every
 
 3. REPURCHASE AGREEMENTS

Example: A bank eventually needed to sell bonds to the other bank and
two banks agreed that bonds would be bought back later at a higher price.
An entity sells an asset and promises or has the option to repurchase it.
Repurchase agreements generally come in three forms:

• An entity has an obligation to repurchase the asset (a forward contact).

• An entity has the right to repurchase the asset (a call option).
• An entity must repurchase the asset if requested to do so by the
customer (a put option).
 4. CONSIGNMENT ARRANGEMENTS

Consignment

It is a method of marketing goods in which the entity called

"consignor" transfers physical possession of certain goods to a
dealer or distributor called the "consignee" that sells the goods
on behalf of the consignor. The consignor shall not recognize
revenue upon delivery of the goods to the consignee until the
goods are sold by the consignee.
 5. BILL AND HOLD ARRANGEMENTS

A contract under which an entity bills a customer for a product but the
entity retains the possession of the product. All of the following criteria
must be met for the recognition of revenue in a bill and hold
arrangement: 
a. The customer requested for the arrangement. 
b. The product must be "identified separately as belonging to the
customer." 
c. The product "must be ready for physical transfer to the customer
anytime." 
d. The entity cannot have the ability to use the product or to direct it to
another customer.
 Government Grants
and
Disclosure of Government Assistance
 UNDER IAS 20

1. Government Assistance
2. Government Grants
3. Grants related to assets
4. Grants related to income
The treatment of government grants
is covered by IAS 20 accounting for
Government Grants and Disclosure
of Government Assistance.
 GOVERNMENT GRANTS

1. The entity will comply with any

conditions attached to the grant.
2. The entity will actually receive
the grant.
ACCOUNTING TREATMENT OF GOVERNMENT GRANTS

IAS 20 requires grants to be

recognized as income over the
relevant periods to match them
with related costs which they have
been received to compensate. 
NON-MONETARY GOVERNMENT GRANTS

A non-monetary asset may be

transferred by government to an
entity as a grant, for example a
piece of land, or other resources.
 PRESENTATION OF GRANTS RELATED TO INCOME

These grants are a credit in profit or loss,

but there is a choice in the method of
disclosure: 

-Present as a separate credit or under a

general heading,
-Deduct from the related expense.
REPAYMENT OF GOVERNMENT  GRANTS

a.) Repayment of a grant related to income: apply first against

any unamortized deferred income set up in respect of the grant;
any excess should be recognized immediately as an expense.

b.) Repayment of a grant related to an asset or reduce the

deferred income balance by the amount repayable. The
cumulative additional depreciation that would have been
recognized to date in the absence of the grant should be
immediately recognized as an expense.
 GOVERNMENT ASSISTANCE

>Some forms of government assistance are

excluded from the definition of government
grants.
>Some forms of government assistance cannot
reasonably have a value placed on them.
>There are transactions with government which
cannot be distinguished from the entity’s normal
trading transactions.
 DISCLOSURE

Requires:
 Accounting policy adopted, including method of
presentation
 Nature and extent of government grants
recognized and other forms of assistance
received
 Unfulfilled conditions and other contingencies
attached to recognized government assistance