IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
BACKGROUND: Issued in 1998 with effect from 1 January 1999
OBJECTIVES:
▪ Prescribe the criteria for recognition and measurement
• Provision
• Contingent Assets and
• Contingent Liabilities
▪ Disclosure for the above items
IAS 37 excludes obligations and contingencies arising from:
▪ Financial instruments [IAS 39 and IFRS 9]
▪ Non-onerous1 executory contracts2
▪ Insurance contracts (IFRS 4), but IAS 37 does apply to other provisions,
contingent liabilities and contingent assets of an insurer
▪ Items covered by another IFRS e.g
• IAS 11 Construction Contracts applies to obligations arising under such
contracts;
• IAS 12 Income Taxes applies to obligations for current or deferred income
taxes;
• IAS 17 Leases applies to lease obligations; and
• IAS 19 Employee Benefits applies to pension and other employee benefit
obligations.
1 Onerous: A contract in which the unavoidable costs* of meeting the obligations under the contract exceed the economic benefits
expected to be received under it.
Unavoidable Costs: The lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it.
2
executory contracts: Both the parties executed equal amount of performance or no party has performed their obligations.
KEY DEFINITIONS
Provision: a liability of uncertain timing or amount.
Liability:
▪ Present obligation as a result of past events
▪ Settlement is expected to result in an outflow of resources (payment)
Contingent liability:
▪ A possible obligation depending on whether some uncertain future event occurs,
or
▪ A present obligation but payment is not probable or the amount cannot be
measured reliably
Contingent asset:
▪ A possible asset that arises from 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.
RECOGNITION CRITERIA
Provision or Contingent Liability or Liability
Certainty of outflow of entity’s resources
Outflow of entity’s
resources
Possible obligation Liability [Amount
Present and timing can be
obligation determined with
certainty]
Arising from Possibility of
past events outcome Contingent
Liability
Virtually Probable Remote
certain to occur
Reasonable/
Provision reliably measure No
Yes
Recognition of Provisions3:
▪ If these three conditions are not met, no provision is recognized.
▪ In applying the first condition, the past event (often referred to as the past obligatory
event) must have occurred.
▪ In applying the second condition, the term probable is defined as “more likely than not to
occur.” This phrase is interpreted to mean the probability of occurrence is greater than
50 percent. If the probability is 50 percent or less, the provision is not recognized.
Recognition Examples:
Legal Obligation4: A legal obligation generally results from a contract or legislation.
3
Kieso, Weygandt and Warfield. (2014). Intermediate Accounting, IFRS edition, 2nd edition, p. 611
4
Ibid, 611
CONSTRUCTIVE OBLIGATIONS
A constructive obligation is an obligation that derives from a company’s actions where:
1. By an established pattern of past practice, published policies, or a sufficiently
specific current statement, the company has indicated to other parties that it will
accept certain responsibilities; and
2. As a result, the company has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.
Example:
Recognition of a Provision—Lawsuit
Case Study 15:
MEASUREMENT OF PROVISION:
Best estimates of
management
Historical data as the Future events
Risk and uncertainty Time value of money
basis
Series of outcomes Probability of
outcomes
Best estimate = Best estimate/expected value = Ʃ
median Probability × outcome
5
Wiley IFRS, practical implementation guide and workbook, 3rd edition, p. 381
Case study 26:
6
Wiley IFRS, practical implementation guide and workbook, 3rd edition, p. 382
Case Study 37:
Measurement of provision:
Historical data as the basis.
ACCOUNTING FOR AN ASSURANCE-TYPE WARRANTY8
7
ZR Koppeschaar et al. (2019). Introduction to IFRS, eight edition, p.
8
Kieso, Weygandt and Warfield. (2014). Intermediate Accounting, IFRS edition, 2nd edition, p. 615.
ASSURANCE-TYPE AND SERVICE-TYPE WARRANTIES
CONTINGENT LIABILITIES
CONTINGENT LIABILITY GUIDELINES
CONTINGENT ASSETS
Contingent Assets guidelines
Disclosure
