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IAS 37General:
Links to prudence, that liabilities are not understated for a true and fair presentation
Amount of provision needs to be the PV in current terms
Provisions are recognised, if not it is a contingent asset and is disclosed
When discussing classification
* Only discuss the correct classification i.e. contingent liability or provision, and not both.
Definitions
Use old liability definition for IAS 37-
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits.
A provision is a liability of uncertain timing or amount.
Provision
First discuss liability definition Entity acted in a manner that
creates an expectation
A provision is a liability of uncertain timing or amount.
A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive- discuss whether legal or constructive) as a result of a
past event;
(b) it is probable (more likely than not- par 15-16) that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
A constructive obligation is an obligation that derives from an entity’s actions where:
(a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity
has indicated to other parties that it will accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those
responsibilities
- Thus: usually not in writing or contract, but normal way of business (e.g. refund policy of store- but e.g. CPC can
make it a legal obligation)
- Measurement: Estimate, Risks and uncertainties, PV if material (longer than 1 year)- use pre tax rate; Future
events with sufficient objective evidence may change provision; gains from expected disposals not taken into
account
- Disclosure:
nature of obligation,
expected timing of outflow,
uncertainties, future events,
reimbursement
- Thus, if a warrantee is given as a written document, it is a legal obligation, as it is like a contract
Provisions note
Carrying amount at the beginning of the year
Amount used during the year
Additional provision
Provision reversed
Carrying amount at the end of the year
, The provision is in existence due to the refunds given for faulty ovens sold (nature). It is expected that this provision
will be utilised within the next twelve month period ending on 31 August 2013 (timing
Contingent liabilities
A contingent liability is: (Definition 1)
• a possible obligation;
• resulting from a past event; 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
A contingent liability is: (Definition 2)
A present obligation
That arises from past events
Which is not recognised as it is not probable that an outflow of economic resources
Will be required to settle the obligation or
The amount of the obligation that cannot be measured
A contingent liability must not be recognised in the financial statements of XX Ltd, but should be disclosed in the notes
to the financial statements for the year ended 31 March 20XX
The following details should be disclosed:
• nature of the event;
The Competition Commission is currently investigating allegations of Rainbow being involved in “cover
pricing” practices.
• estimated financial effect (where practicable).
At year end, no estimate of any financial effect was available yet. This fact will have to be disclosed.
• uncertainties relating to the amount or timing of any outflow;
The outcome of the investigation will confirm whether Rainbow will be liable for any fines with regards to
the “cover pricing” allegations or not. The timing of this outcome is uncertain and the amount of any
possible fines is also uncertain.
• possibility of any reimbursements.
The possibility of any reimbursements is not applicable to these circumstances.
- Thus, distinguish between present or possible obligation, to decide which definition to apply – e.g. warrantees
already present obligation
- No disclosure required if possibility of obligation arising is remote
- E.g. reimbursement- disclose the fact that there is not one if there isn’t
- Par 86- disclosure- narrative’
- Thus when answering: Discuss and apply definition as well as all the disclosure requirements
- If the second part of the definition applies- need to discuss I and ii
Contingent assets
A contingent asset is a possible asset;
• that arises from past events;
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