PAS 37

Provisions,
Contingent
Liabilities and
Contingent
Assets
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
other 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 becomes
onerous when the cost of fulfilling it exceeds the
economic benefits expected to be derived from it.

For example, Entity A commits to purchase 1,000 units

of inventory for ₱100 per unit under a non-cancellable
purchase commitment for future delivery. Generally, no
liability is recognized on the contract until the
inventories are delivered. However, if the inventories
become obsolete before the delivery, such that the
price declines to ₱20 per unit, Entity A recognizes a loss
of ₱80 per unit (₱100 committed price - ₱20 actual
price). In this case, PAS 37 applies because the contract
became onerous.
Provisions

A provision is “a liability of uncertain

timing or amount”. (PAS 37.10)

Provisions differ from other liabilities

because of the uncertainty in the timing
of their settlement or the amount needed
to settle them. Unlike other liabilities,
provisions must necessarily be estimated.
Although some other liabilities are also
estimated, their uncertainty is generally
much less compared to provisions.
Examples of Provisions

a. Warranty obligations
b. Estimated liabilities on pending lawsuits
c. Provisions for environmental damages
d. Provisions of decommissioning costs of an item of
PPE
e. Obligations caused by an entity’s policy to make
refunds to customers
f. Obligations arising from guarantees
g. Provisions on onerous contracts (e.g., purchase
commitment)
h. Provisions for restructuring costs

Provisions are presented in the statement of financial

position separately from other types of liabilities.
Recognition

A provision is recognized when all of the following

conditions are met:

a. The entity has a present obligation (legal or

constructive) resulting from a past event;
b. It is probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation; and
c. The amount of the obligation can be reliably
estimated.

If any of the conditions is not met, no provision is

recognized. (PAS 37.14)
Present Obligation

In rare cases where it is not clear

whether there is a present obligation,
an entity deems a past event to give
rise to a present obligation if available
evidence shows that it is more likely
than not that a present obligation
exists at the end of the reporting
period.
Past Event

A past event that creates a present obligation is

called an obligating event. An obligating event is
one whereby the entity does not have any other
recourse but to settle an obligation. This is the case
where:

a. The obligation is legally enforceable (legal

obligation); or
b. The entity’s actions (e.g., past practice or
published policies) have created valid
expectations from others that the entity will
discharge the obligation (constructive
obligation).
Probable Outflow of
Resources Embodying Economic
Benefits

Probable means “more likely than not”.

Meaning, there is a greater chance that
the present obligation will cause settlement
than not.

Reliable Estimate of the Obligation

Provisions necessarily need to be estimated.

If a reliable estimate cannot be made, no
provision is recognized.
Contingent Liabilities

In a general sense, all provisions are contingent

because they are of uncertain timing or
amount. However, PAS 37 uses the term
“contingent” to refer to those liabilities and
assets that are not recognized because they
do not meet all of the recognition criteria.

Contingent liabilities are disclosed only,

except when the possibility of an outflow of
resources embodying economic benefits is
remote.
A provision and a contingent liability are
differentiated below:

Provision Contingent Liability

 A liability of an uncertain  A possible obligation
timing or amount that meets whose existence will be
all of the following confirmed only by the
conditions: occurrence or non-
occurrence of one or more
a. Present obligation; uncertain future events not
b. Probable outflow; and wholly within the control of
c. Reliably estimated the entity; or

 A present obligation but:

i. It is not probable that
it will cause an outflow
in its settlement; or
ii. Its amount cannot be
reliably estimated.
Contingent Assets

Contingent assets are those that are not recognized because

they do not meet all of the asset recognition criteria (i.e., ‘resource
controlled arising from past events’, ‘probable inflow’, and ‘reliable
estimation’).

Contingent assets include possible inflows of economic benefits

from unplanned or unexpected events, such as claims that an
entity is seeking through legal processes where the outcome is
uncertain (e.g., claims under tax disputes and disputed insurance
claims).

Contingent assets are disclosed only, if the inflow of economic

benefits is probable. They are not recognized because
recognizing them may result to the recognition of income that may
never be realized.

However, when the realization of income is virtually certain

(100% chance of occurrence), the asset is not a contingent asset
and therefore it is appropriate to recognize it.
 Provision Contingent
Liability

Contingen Probable Possible Remote

t
Liability Recognize Disclose Ignore
and only
Disclose
Asset Disclose Ignore Ignore
only

Contingent
Asset
Measurement

Provisions are measured at the best estimate of the amount

needed to settle them at the end of the reporting period.

Making the estimate requires management’s judgment,

supplemented by experience from similar transactions, and in
some cases, reports from independent experts. The estimate
also considers events after the reporting period.

If the provision being measured involves a large population

of items, the obligation is measured at its “expected value”.

Expected value is computed by weighting all possible

outcomes by their associated probabilities.

If there is a continuous range of possible outcomes, and

each point in that range is as likely as any other, the mid-
point of the range is used.
Recording the Provision

Provisions are normally recognized as

a debit to expense (or loss) and a
credit to an estimated liability
account. However, sometimes a
provision forms part of the cost of an
asset. For example, provisions for
restoration and decommissioning
costs are capitalized as part of the
cost of PPE.
Changes in Provisions

Provisions are reviewed at the end of each

reporting period and adjusted to reflect the
current best estimate. Changes in provisions
are accounted for prospectively by accruing
an additional amount or by reversing a
previously recognized amount.

When the provision is discounted, the

unwinding (amortization) of the related
discount which increases the carrying amount
of the provisions is recognized as interest
expense.
Use of Provision

A provision is used only for the

expenditure it was originally intended
for. Charging expenditure against a
provision that is intended for another
purpose is inappropriate as it would
conceal the impact of two different
events.
Future Operating Losses

No provision is recognized for future

operating losses because they do not
meet the definition of a liability (i.e.,
‘arising from past events’). The
expectation of future operating losses
may indicate that certain assets may
be impaired. Those assets are tested
for impairment under PAS 36.
Onerous Contracts

The provision recognized from an

onerous contract reflects the least
net cost of exiting from the contract,
which is the lower of the cost of
fulfilling it and any compensation or
penalties arising from failure to fulfill
it.
Restructuring

Restructuring is “a program that is planned and

controlled by management, and materially changes
either:
a. The scope of a business undertaken by an entity; or
b. The manner in which that business is conducted.

Examples:
c. Sale or termination of a line of business;
d. Closure of business locations in a country or region
or the relocation of business activities from one
country or region to another;
e. Changes in management structure, for example,
eliminating a layer or management; and
f. Fundamental reorganizations that have a material
effect on the nature and focus of the entity’s
operations.
Sale of Operation

A legal obligation exists (and therefore a provision

is recognized) only if, at the end of the
reporting period, a binding sale agreement is
obtained. This is because, until a binding sale
agreement is obtained, the entity can still change
its mind and may withdraw its plan to sell if it
cannot find a purchaser under acceptable terms.

If the binding sale agreement is obtained only

after the end of the reporting period, no provision
is recognized because no present obligation exists
at the end of the reporting period. This, however,
may be disclosed as a non-adjusting event after the
reporting period.
Closure or Reorganization

A constructive obligation exists (and therefore a

provision is recognized) only if at the reporting date,
the entity has created valid expectations from others
that it will discharge certain responsibilities. This would
be the case if, at the end of the reporting period,
both the following conditions are met:
a. Detailed formal plan for the restructuring is
adopted; and
b. The plan is announced to those affected by it.

A mere board decision to restructure is not enough. No

provision is recognized if the detailed plan is adopted
or announced after the end of the reporting period.
This may also be disclosed as a non-adjusting event
after the reporting period.
Measurement of Restructuring Provision

A restructuring provision includes only the direct

costs that are necessarily entailed with the
restructuring. It does not include costs that relate
to the ongoing activities of the entity or the future
conduct of its business. A restructuring provision
excludes the following costs:

a. Retraining or relocating continuing staff

b. Marketing
c. Investment in new systems and distribution
networks
Disclosure

a. Reconciliation for each class of provision showing:

i. Beginning balance
ii. Additions (additional provisions recognized, unwinding of
the discount, and effect of a change in discount rate)
iii. Deductions (amounts charged against the provision or
reversed)
iv. Ending balance

b. Comparative information is not required.

c. For each class of provision, a brief description of the :

i. Nature
ii. Timing
iii. Uncertainties
iv. Assumptions
v. reimbursement