This document offers a summary of key concepts regarding provisions, contingencies and events after the reporting period. Brief examples are included with calculations as further clarity
PROVISIONS, CONTINGENCIES AND EVENTS AFTER THE REPORTING
PERIOD
IAS 37 Provision defines these as follows:
Liability: a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow of
resources embodying economic benefits.
Provision: a liability of uncertain timing or amount
Since a provision is a liability, it must meet the definition and
recognition criteria of a liability as per IAS 37 i.e. using the old
conceptual framework
The recognition criteria as per IAS 37:
The liability must be reliably measurable and
The outflow of economic benefits must probable
Contingent liability: these arise because the obligations do not meet
the liability definition as per IAS 37 or the recognition criteria:
Simply put:
1. The liability definition is not met because there is a possible
obligation and not a present obligation. The obligation is dependent
on an event taking place or
2. The recognition criteria are not met which means that the liability
is not reliably measurable or the outflow of economic benefits is not
probable
Contingent asset: this is a possible asset arising from past events and
is dependent on the on an event taking place.
, Breaking down the liability definition
Present obligation:
To easily determine whether there is an obligation, think about
whether the obligation would still exist if the entity were to shut
down today.
Past event:
The event must have occurred on or before reporting date. This
event must be an obligating event.
An obligating event is one that leaves the entity with no realistic
alternative but to settle the liability.
The obligating event is generally seen in the following ways:
1. A legal obligation: arising from a contract, legislation, or
operation of law
2. A constructive obligation: established by the entity’s past
practices, published policies, publicly made statements
This obligation must exist independently of the entity’s actions
i.e. the obligation would still exist if the entity would shut down
or there is no action that the entity can take to avoid the
obligation
and it must always involve another party (3rd party)
Contingent liabilities and contingent assets are not recognised in the
financial statements but are rather disclosed in the notes to the
financial statements. If the possibility of outflow/inflow of economic
benefits is remote, then you do not disclose. Simply ignore
Provisions on the other hand will be recognised in the financial
statements but separately from pure liabilities.
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