This document provides an overview of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. It discusses the objective, scope, definitions, recognition criteria, measurement, application and disclosure requirements for provisions, contingent liabilities, and contingent assets. Key points covered include defining provisions as liabilities of uncertain timing or amount, the criteria for recognizing provisions which includes a probable outflow of resources, and measuring provisions at the best estimate of the expenditure required to settle the obligation.
This document provides an overview of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. It discusses the objective, scope, definitions, recognition criteria, measurement, application and disclosure requirements for provisions, contingent liabilities, and contingent assets. Key points covered include defining provisions as liabilities of uncertain timing or amount, the criteria for recognizing provisions which includes a probable outflow of resources, and measuring provisions at the best estimate of the expenditure required to settle the obligation.
This document provides an overview of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. It discusses the objective, scope, definitions, recognition criteria, measurement, application and disclosure requirements for provisions, contingent liabilities, and contingent assets. Key points covered include defining provisions as liabilities of uncertain timing or amount, the criteria for recognizing provisions which includes a probable outflow of resources, and measuring provisions at the best estimate of the expenditure required to settle the obligation.
This document provides an overview of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. It discusses the objective, scope, definitions, recognition criteria, measurement, application and disclosure requirements for provisions, contingent liabilities, and contingent assets. Key points covered include defining provisions as liabilities of uncertain timing or amount, the criteria for recognizing provisions which includes a probable outflow of resources, and measuring provisions at the best estimate of the expenditure required to settle the obligation.
criteria and measurement bases are applied. Disclose sufficient information in the notes to enable users to understand their nature, timing and amount Scope Covers all provisions, contingent liabilities and assets except those covered by another standard eg. IAS 11,12,19,21 eg. IFRS 4,9,15 1. Provisions 1.1 Definition:- Liability:- Present obligation arising from past events, the settlement of which is expected to result in an out flow from the entity of resources embodying economic benefits. continued Provision:- Liability of uncertain timing or amount. eg. Provision for restructuring cost, decommissioning and environmental cost. Present Obligation Present obligation (Legal or Constructive) Legal obligation derives from A contract Legislation Other operations of law eg. Warranties given by manufacturer Legislation enacted to require past Environmental damage to be put right continued Constructive obligations arise from By an established pattern of past practice Published policies By Sufficiently specified current statement eg. Restructuring program Retailers refund policy Environmental policy Past Events Obligating Event :- Event that creates legal or constructive obligation that result in an entity having no realistic alternatives to settling that obligation. eg.Sale of goods for warranty liability Contamination of land for environmental obligation Construction of power station for decommissioning liability Probable out flow to Settle Probable in this context defined as ‘more likely than not’ If probability not more than 50%, must not provide disclose a contingent liability. continued Under IAS 37, if there was 40% probability no provision would be recognized Under proposal in the ED A provision would be recognized and the degree of probability would be reflected in measuring the amount to be recognized 1.2 Recognition Recognition Criteria:- A provision shall be recognized when: (a)Present obligation (Legal orConstructive) exists as a result of past event; (b) Probable that an out flow of resources required to settle the obligation; and (c)Amount of obligation can be estimated reliably. 1.3 Measurement Measure at ‘best estimate’ • Single obligation = Most likely outcome • Large population = Expected value Risk and Uncertainties are take into account in reaching best estimate. continued If time value of money is material, measure the provision at Present value. Review provisions at reporting date and adjust to reflect best estimate eg. Change in discount rate continued
Judgment by preparers:- similar
transaction, use expert, industry model Consider Reimbursement 1.4 Application Do not recognize Provision for future operating losses Recognize onerous contract as a provision Recognize provision when general recognition continued criteria are met for Restructuring eg. The sale or termination of line of business Closure/relocation of business Changes in management structure continued To conclude that there is present obligation (legal or constructive) at the ending of the reporting period for Restructure:- 1. An entity must have a detailed formal Plan 2. It must have raised a valid expectation in those affected. continued Restructuring cost= only direct expenditure i.e. does not include Retraining or relocating continuing staff; Marketing; Investment in new systems and distribution networks 1.5 Disclosures For each class of provision, disclose Carrying amount of the beginning and end of period Additional provisions made in the period Amounts used during the period Un used amounts reversed during the period continued Adjustment Description of obligation Amount of any expected reimbursement Note:- Do not have to disclose changes for comparative period --- explicitly stated in IAS 37 2 Contingent Liabilities 2.1 Definition Contingent liabilities:- Possible obligation that arises from past event whose existence will only be confirmed by uncertain future events not wholly within entity's control ; or continued Present obligation that arise from past event but is not recognized because:- • Economic outflow is not probable; or • Amount cannot be reliably measured 2.2 Recognition Do not recognize Disclose unless possibility of outflow is remote 2.3 Disclosures disclose A brief description of the nature of the contingent liability An estimate of its financial effect The possibility of reimbursement 3 Contingent Assets 3.1 Definition Contingent Assets:- Possible Asset that arises from past event whose existence will only be confirmed by uncertain future events not wholly within entity's control eg. Insurance claims, legal actions 3.2 Recognition Do not recognize An asset can only be recognized where realization is ‘Virtually certain’ Disclose where inflow is probable 3.3 Disclosures Disclose A brief description of the nature of contingent asset An estimate of its financial effect For all Disclosure If any information not disclosed because of impracticable, disclose that fact In extremely rare case need not disclose the information but should disclose general nature of disputes, together with the fact that, and reason, why the information has not been disclosed Thank You Questions and Discussion Exercises and Discussions 1. Identify whether each of the following would be a Liability, a Provision or a Contingent liability or none of the above in the financial statement of the company A at its reporting date of 30 June 2010. Assume that company A’s financial statements are authorized for issue on 24 August 2010. A= An amount of Birr 35,000 owing to company Z for services rendered during May 2010 continued B= Long service leave, estimated to be Birr 500,000 owing to employees in respect of past service continued C= Cost of Birr 26,000 estimated to be incurred for relocating employee D from company A’s head office location to another city. The staff will physically relocate during July 2010 continued D= provisions of birr 50,000 for the overhaul of a machine. The overhaul is needed every 5 years and the machine was five years old as at 30 June 2010 continued E= Damages awarded against company A resulting from a court case decided on 26 June 2010. The judge has announced that the amount of damages will be set at a future date, expected to be in September 2010. Company A has received advice from its lawyers that the amount of damages could be anything between Birr 20,000 and birr7million continued 2. Determine the amount of provision to recognize. Identify the considerations you used in arriving at the ‘best estimate’ of outflow of economic benefits. continued A= An entity faces 100 legal claims each with a 40% likelihood of success with no cost, and a 60% likelihood of failure with a cost of each claim Birr 1 million. continued B= An entity faces a single legal claim, with a 40% likelihood of success with no cost, and a 60% likelihood of failure with a cost of each claim Birr 1 million. continued C= An entity is required to replace a major component in an asset under a warranty. Each replacement cost Birr 1 million. From experience, there is a 30% chance a single failure, 50% chance of two failures, and 20% chance of three failures. continued D= An entity is required to replace a major component in an asset under a warranty. Each replacement cost Birr 1 million. From experience, there is a 40% chance a single failure, 30% chance of two failures, and 30% chance of three failures. continued 3. Provisions All entities A to F below have reporting dates of 31 December. Assume that reliable estimates can be made of the obligations. Determine for each situation whether a provision should be recognized. continued A = warranties A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the sale contract the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that may become apparent with in three years of sale. On past experience, its probable that there will be some claims under warranty. continued B= Refund Policy A retail store has a policy of refunding purchases by dissatisfied customers, even though its under no legal obligation to do so. Its refund policy is generally known. continued C = Closure of division On 12 December the board of directors decided to close down a division of the entity. Before the reporting date (31 December) the decision was not communicated to any of those affected and no other steps were taken to implement the decision. continued C = Closure of division On 12 December the board of directors decided to close down a division of the entity. On 20 December a detailed plan for closing down the division was agreed by the board of directors . Letters were sent to customers warning them to seek an alternative source of supply and redundancy notice were sent to the staff affected. continued D= Onerous contract An entity operates profitably from property leased under operating lease. During December the entity relocates its operations to new premises. The lease on the old property has four years to run from the end of December and is non-cancellable. continued E= Court case Customers have begun legal proceedings against the entity and are seeking damages. Up to date of authorization of the financial statement for 2010 for issue, the entity’s lawyers advise that its probable that the entity will not be found liable. How ever when the entity prepares its financial statement for the 2011 , the lawyers advice has changed; they believe that developments in the case in 2011 are likely to result in the case being decided against the entity. What accounting treatment are required for 2010 and 2011 financial statement? continued F = Cost of major overhaul An airline is required by law to overhaul its aircraft once every three years. At 31 December two years remained before the next overhaul was due. Thank You Questions and Discussion