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IAS 37Liabilities, Provisions & Contingencies

Mark Fielding-Pritchard

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Definitions Provision: A liability of uncertain timing or amount.   Liability: A present obligation as a result of past events the

settlement of which is expected to result in an outflow of resources.   Contingent liability: A possible obligation depending on the

occurrence/ nonoccurrence of uncertain future events, or a present obligation but no probable outflow of economic benefits or amount cannot be reliably measured.

  Contingent assets: A possible asset that arises from past events

and whose existence will be confirmed only by the occurrence/nonoccurrence of uncertain future events. Contingent assets are not recognized, but are disclosed if probable. When realization is virtually certain, the asset is no longer a contingent asset.

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Scope

Relates to provisions and contingent assets/liabilities

 

Out of scope:

Financial instruments valued at fair value (FV)

Executory contracts, unless they are onerous contracts

Insurance contracts

Provisions covered by other IFRS:

Construction Contracts , tax etc

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Provisions

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Not Provisions

Accounts payable and other items where there is no doubt over the amount due

Accounting adjustments, depreciation, doubtful debts, impairment

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Do We Make a Provision?

Situation Provision? Contingent liability disclosure?

There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote.

No No (IAS 37: 86)

There is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources.

No Yes, disclosures are required for the contingent liability. (IAS

37: 86)A past event occurred which has resulted in a present obligation that probably requires an outflow of resources.

Yes Yes, disclosures are required for the provision.(IAS 37: 84-85)

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Contingent Liabilities

Is an obligation:

That may arises because of past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity (such as a legal case); or   A present obligation that arises from past events but is not

recognized because:

it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

the amount of the obligation cannot be measured

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Provision Decision Chart

Present obligation

as a result of an obligating event?

No No

Possible obligation

Yes Yes

No Yes

Probable outflow?

Remote?

Yes

No No

Reliable estimate?

Yes

Provision Disclose contingent liability

Do nothing

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

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How Much Do we Provide?Maximum Loss

How Much

?

All Expenses

Include

Sums due from insuranceTake into account time value of money if material

Exclude

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How Do We Know the Maximum Loss?

Management

Experience

Press Experts

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Where Do We Get the Discount rate From?

Use standard techniques as for project appraisal Reflects, risk, conditions in force at current time Should be pre tax

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Contingent Assets

Criteria are as for liability If probable disclose If certain ‘make positive provision’ Dr Receivables

Cr Revenue/Other Income as appropriate

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What If We Have a Liability We Will Receive Money For

A pilot flies a light aircraft into our factory. We will have to repair the damage but the pilot offers to pay for the

damage

Recognise

Recognise reimbursement if virtually certain

Up to the amount of the liability, but no more

No offset against provision in BS

However expense in Income Statement is net

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Adjustments to Provisions

Provisions should be reviewed at each balance sheet date and adjusted to reflect the best estimate at that time

If the outflow of resources has now become unlikely, the provision should be reversed out.

Provisions should be ‘transferred ‘ to other expenses

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Business Restructuring One danger is that businesses can use provisions to

smooth profits Rank Hovis MacDougal had restructuring costs in their

accounts in 8 out of 10 years (extraordinary items) Examples may include

sale or termination of a line of business

the closure of business locations

changes in organisational structure — redundancy

A binding sale agreement or document showing action must be present.