IAS 37 Provisions, Contingent Liabilities and Contingent
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37Provisions, Contingent Liabilities and Contingent Assetsoutlines
the accounting for provisions (liabilities of uncertain timing or
amount), together with contingent assets (possible assets) and
contingent liabilities (possible obligations and present
obligations that are not probable or not reliably measurable).
Provisions are measured at the best estimate (including risks and
uncertainties) of the expenditure required to settle the present
obligation, and reflects the present value of expenditures required
to settle the obligation where the time value of money is
material.IAS 37 was issued in September 1998 and is operative for
periods beginning on or after 1 July 1999.History of IAS
37August1997Exposure Draft E59Provisions, Contingent Liabilities
and Contingent Assets
September1998IAS 37Provisions, Contingent Liabilities and
Contingent Assets
1July1999Effective date of IAS 37 (1998)
30June2005Exposure Draft of substantial revisions to IAS 37
Related Interpretations IFRIC 1Changes in Existing
Decommissioning, Restoration and Similar Liabilities IFRIC 5Rights
to Interests Arising from Decommissioning, Restoration and
Environmental Funds IFRIC 6Liabilities Arising from Participating
in a Specific Market Waste Electrical and Electronic Equipment
IFRIC 17Distributions of Non-cash Assets to Owners
IFRIC21LeviesAmendments under consideration by the IASB Research
project Non-financial liabilities Research project Discount
ratesSummary of IAS 37ObjectiveThe objective of IAS 37 is to ensure
that appropriate recognition criteria and measurement bases are
applied to provisions, contingent liabilities and contingent assets
and that sufficient information is disclosed in the notes to the
financial statements to enable users to understand their nature,
timing and amount. The key principle established by the Standard is
that a provision should be recognised only when there is a
liability i.e. a present obligation resulting from past events. The
Standard thus aims to ensure that only genuine obligations are
dealt with in the financial statements planned future expenditure,
even where authorised by the board of directors or equivalent
governing body, is excluded from recognition.ScopeIAS 37 excludes
obligations and contingencies arising from: [IAS 37.1-6] financial
instruments that are in the scope ofIAS39Financial Instruments:
Recognition and Measurement(orIFRS9Financial Instruments)
non-onerous executory contracts insurance contracts
(seeIFRS4Insurance Contracts), but IAS 37 does apply to other
provisions, contingent liabilities and contingent assets of an
insurer items covered by another IFRS. For example,IAS
11Construction Contractsapplies to obligations arising under such
contracts;IAS 12Income Taxesapplies to obligations for current or
deferred income taxes;IAS 17Leasesapplies to lease obligations;
andIAS 19Employee Benefitsapplies to pension and other employee
benefit obligations; and .Key definitions [IAS 37.10]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 reliablyContingent 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 of a provisionAn entity must recognise a
provision if, and only if: [IAS 37.14] a present obligation (legal
or constructive) has arisen as a result of a past event (the
obligating event), payment is probable ('more likely than not'),
and the amount can be estimated reliably.An obligating event is an
event that creates a legal or constructive obligation and,
therefore, results in an entity having no realistic alternative but
to settle the obligation. [IAS 37.10]A constructive obligation
arises if past practice creates a valid expectation on the part of
a third party, for example, a retail store that has a long-standing
policy of allowing customers to return merchandise within, say, a
30-day period. [IAS 37.10]A possible obligation (a contingent
liability) is disclosed but not accrued. However, disclosure is not
required if payment is remote. [IAS 37.86]In rare cases, for
example in a lawsuit, it may not be clear whether an entity has a
present obligation. In those cases, a past event is deemed to give
rise to a present obligation if, taking account of all available
evidence, it is more likely than not that a present obligation
exists at the balance sheet date. A provision should be recognised
for that present obligation if the other recognition criteria
described above are met. If it is more likely than not that no
present obligation exists, the entity should disclose a contingent
liability, unless the possibility of an outflow of resources is
remote. [IAS 37.15]Measurement of provisionsThe amount recognised
as a provision should be the best estimate of the expenditure
required to settle the present obligation at the balance sheet
date, that is, the amount that an entity would rationally pay to
settle the obligation at the balance sheet date or to transfer it
to a third party. [IAS 37.36] This means: Provisions for one-off
events (restructuring, environmental clean-up, settlement of a
lawsuit) are measured at the most likely amount. [IAS 37.40]
Provisions for large populations of events (warranties, customer
refunds) are measured at a probability-weighted expected value.
[IAS 37.39] Both measurements are at discounted present value using
a pre-tax discount rate that reflects the current market
assessments of the time value of money and the risks specific to
the liability. [IAS 37.45 and 37.47]In reaching its best estimate,
the entity should take into account the risks and uncertainties
that surround the underlying events. [IAS 37.42]If some or all of
the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement should be recognised
as a separate asset, and not as a reduction of the required
provision, when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the
obligation. The amount recognised should not exceed the amount of
the provision. [IAS 37.53]
In measuring a provision consider future events as follows:
forecast reasonable changes in applying existing technology [IAS
37.49] ignore possible gains on sale of assets [IAS 37.51] consider
changes in legislation only if virtually certain to be enacted [IAS
37.50]Remeasurement of provisions [IAS 37.59] Review and adjust
provisions at each balance sheet date If an outflow no longer
probable, provision is reversed.Some examples of
provisionsCircumstanceRecognise a provision?
Restructuring by sale of an operationOnly when the entity is
committed to a sale, i.e. there is a binding sale agreement [IAS
37.78]
Restructuring by closure or reorganisationOnly when a detailed
form plan is in place and the entity has started to implement the
plan, or announced its main features to those affected. A Board
decision is insufficient [IAS 37.72, Appendix C, Examples 5A &
5B]
WarrantyWhen an obligating event occurs (sale of product with a
warranty and probable warranty claims will be made) [Appendix C,
Example 1]
Land contaminationA provision is recognised as contamination
occurs for any legal obligations of clean up, or for constructive
obligations if the company's published policy is to clean up even
if there is no legal requirement to do so (past event is the
contamination and public expectation created by the company's
policy) [Appendix C, Examples 2B]
Customer refundsRecognise a provision if the entity's
established policy is to give refunds (past event is the sale of
the product together with the customer's expectation, at time of
purchase, that a refund would be available) [Appendix C, Example
4]
Offshore oil rig must be removed and sea bed restoredRecognise a
provision for removal costs arising from the construction of the
the oil rig as it is constructed, and add to the cost of the asset.
Obligations arising from the production of oil are recognised as
the production occurs [Appendix C, Example 3]
Abandoned leasehold, four years to run, no re-letting possibleA
provision is recognised for the unavoidable lease payments
[Appendix C, Example 8]
CPA firm must staff training for recent changes in tax lawNo
provision is recognised (there is no obligation to provide the
training, recognise a liability if and when the retraining occurs)
[Appendix C, Example 7]
Major overhaul or repairsNo provision is recognised (no
obligation) [Appendix C, Example 11]
Onerous (loss-making) contractRecognise a provision [IAS
37.66]
Future operating lossesNo provision is recognised (no liability)
[IAS 37.63]
RestructuringsA restructuring is: [IAS 37.70] sale or
termination of a line of business closure of business locations
changes in management structure fundamental
reorganisations.Restructuring provisions should be recognised as
follows: [IAS 37.72] Sale of operation:recognise a provision only
after a binding sale agreement [IAS 37.78] Closure or
reorganisation:recognise a provision only after a detailed formal
plan is adopted and has started being implemented, or announced to
those affected. A board decision of itself is insufficient. Future
operating losses:provisions are not recognised for future operating
losses, even in a restructuring Restructuring provision on
acquisition:recognise a provision only if there is an obligation at
acquisition date [IFRS 3.11]Restructuring provisions should include
only direct expenditures necessarily entailed by the restructuring,
not costs that associated with the ongoing activities of the
entity. [IAS 37.80]What is the debit entry?When a provision
(liability) is recognised, the debit entry for a provision is not
always an expense. Sometimes the provision may form part of the
cost of the asset. Examples: included in the cost of inventories,
or an obligation for environmental cleanup when a new mine is
opened or an offshore oil rig is installed. [IAS 37.8]Use of
provisionsProvisions should only be used for the purpose for which
they were originally recognised. They should be reviewed at each
balance sheet date and adjusted to reflect the current best
estimate. If it is no longer probable that an outflow of resources
will be required to settle the obligation, the provision should be
reversed. [IAS 37.61]Contingent liabilitiesSince there is common
ground as regards liabilities that are uncertain, IAS 37 also deals
with contingencies. It requires that entities should not recognise
contingent liabilities but should disclose them, unless the
possibility of an outflow of economic resources is remote. [IAS
37.86]Contingent assetsContingent assets should not be recognised
but should be disclosed where an inflow of economic benefits is
probable. When the realisation of income is virtually certain, then
the related asset is not a contingent asset and its recognition is
appropriate. [IAS 37.31-35]DisclosuresReconciliation for each class
of provision: [IAS 37.84] opening balance additions used (amounts
charged against the provision) unused amounts reversed unwinding of
the discount, or changes in discount rate closing balanceA prior
year reconciliation is not required. [IAS 37.84]For each class of
provision, a brief description of: [IAS 37.85] nature timing
uncertainties assumptions reimbursement, if any
IAS 10 Events After the Reporting PeriodShare on emailShare on
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article linksOverviewIAS 10Events After The Reporting
Periodcontains requirements for when events after the end of the
end of the reporting period should be adjusted in the financial
statements. Adjusting events are those providing evidence of
conditions existing at the end of the reporting period, whereas
non-adjusting events are indicative of conditions arising after the
reporting period (the latter being disclosed where material).IAS 10
was reissued in December 2003 and applies to annual periods
beginning on or after 1 January 2005.History of IAS
10July1977Exposure Draft E10Contingencies and Events Occurring
After the Balance Sheet Date
October1978IAS 10Contingencies and Events Occurring After the
Balance Sheet Dateeffective 1 January 1980
1994IAS 10 (1978) was reformatted
August1997Exposure Draft E59Provisions, Contingent Liabilities
and Contingent Assets
September1998IAS 37Provisions, Contingent Liabilities and
Contingent Assets
1July1999Effective date of IAS 37, which superseded those
portions of IAS 10 (1978) dealing with contingencies
November1998Exposure Draft E63Events After the Balance Sheet
Date
May1999IAS 10 (1999)Events After the Balance Sheet
Datesuperseded those portions of IAS 10 (1978) dealing with events
after the balance sheet date
1January2000Effective date of IAS 10 (1999)
18December2003Revised version of IAS 10 issued by the IASB
1January2005Effective date of IAS 10 (Revised 2003)
6September2007RetitledEvents after the Reporting Periodas a
consequential amendment resulting from revisions toIAS 1
Related Interpretations NoneSummary of IAS 10Key
definitionsEvent after the reporting period:An event, which could
be favourable or unfavourable, that occurs between the end of the
reporting period and the date that the financial statements are
authorised for issue. [IAS 10.3]Adjusting event:An event after the
reporting period that provides further evidence of conditions that
existed at the end of the reporting period, including an event that
indicates that the going concern assumption in relation to the
whole or part of the enterprise is not appropriate. [IAS
10.3]Non-adjusting event:An event after the reporting period that
is indicative of a condition that arose after the end of the
reporting period. [IAS 10.3]Accounting Adjust financial statements
for adjusting events - events after the balance sheet date that
provide further evidence of conditions that existed at the end of
the reporting period, including events that indicate that the going
concern assumption in relation to the whole or part of the
enterprise is not appropriate. [IAS 10.8] Do not adjust for
non-adjusting events - events or conditions that arose after the
end of the reporting period. [IAS 10.10] If an entity declares
dividends after the reporting period, the entity shall not
recognise those dividends as a liability at the end of the
reporting period. That is a non-adjusting event. [IAS 10.12]Going
concern issues arising after end of the reporting periodAn entity
shall not prepare its financial statements on a going concern basis
if management determines after the end of the reporting period
either that it intends to liquidate the entity or to cease trading,
or that it has no realistic alternative but to do so. [IAS
10.14]DisclosureNon-adjusting events should be disclosed if they
are of such importance that non-disclosure would affect the ability
of users to make proper evaluations and decisions. The required
disclosure is (a) the nature of the event and (b) an estimate of
its financial effect or a statement that a reasonable estimate of
the effect cannot be made. [IAS 10.21]A company should update
disclosures that relate to conditions that existed at the end of
the reporting period to reflect any new information that it
receives after the reporting period about those conditions. [IAS
10.19]Companies must disclose the date when the financial
statements were authorised for issue and who gave that
authorisation. If the enterprise's owners or others have the power
to amend the financial statements after issuance, the enterprise
must disclose that fact. [IAS 10.17]
IAS 24 Related Party DisclosuresShare on emailShare on
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article linksOverviewIAS 24Related Party Disclosuresrequires
disclosures about transactions and outstanding balances with an
entity's related parties. The standard defines various classes of
entities and people as related parties and sets out the disclosures
required in respect of those parties, including the compensation of
key management personnel.IAS 24 was reissued in November 2009 and
applies to annual periods beginning on or after 1 January
2011.History of IAS 24March1983Exposure Draft E25Disclosure of
Related Party Transactions
July1984IAS 24Related Party Disclosures
1January1986Effective date of IAS 24 (1984)Related Party
Disclosures
1994IAS 24 was reformatted
18December2003Revised version of IAS 24 issued by the IASB
1January2005Effective date of IAS 24 (2003)
February2007Exposure Draft ofProposed Amendments to IAS 24issued
Click forPress Release(PDF 63k)
11December2008Revised Exposure Draft ofProposed Amendments to
IAS 24issued Click forPress Release(PDF 47k)
4November2009Revised IAS 24 issued Click forPress Release(PDF
63k)
1January2011Effective date of IAS 24 (2009)
Related Interpretations NoneAmendments under consideration by
the IASB NoneSummary of IAS 24Objective of IAS 24The objective of
IAS 24 is to ensure that an entity's financial statements contain
the disclosures necessary to draw attention to the possibility that
its financial position and profit or loss may have been affected by
the existence of related parties and by transactions and
outstanding balances with such parties.Who are related parties?A
related party is a person or entity that is related to the entity
that is preparing its financial statements (referred to as the
'reporting entity') [IAS 24.9]. (a) A person or a close member of
that person's family is related to a reporting entity if that
person: (i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or (iii)
is a member of the key management personnel of the reporting entity
or of a parent of the reporting entity. (b) An entity is related to
a reporting entity if any of the following conditions applies: (i)
The entity and the reporting entity are members of the same group
(which means that each parent, subsidiary and fellow subsidiary is
related to the others). (ii) One entity is an associate or joint
venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member). (iii)
Both entities are joint ventures of the same third party. (iv) One
entity is a joint venture of a third entity and the other entity is
an associate of the third entity. (v) The entity is a
post-employment defined benefit plan for the benefit of employees
of either the reporting entity or an entity related to the
reporting entity. If the reporting entity is itself such a plan,
the sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person
identified in (a). (vii) A person identified in (a)(i) has
significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the
entity).The following are deemed not to be related: [IAS 24.11] two
entities simply because they have a director or key manager in
common two venturers who share joint control over a joint venture
providers of finance, trade unions, public utilities, and
departments and agencies of a government that does not control,
jointly control or significantly influence the reporting entity,
simply by virtue of their normal dealings with an entity (even
though they may affect the freedom of action of an entity or
participate in its decision-making process) a single customer,
supplier, franchiser, distributor, or general agent with whom an
entity transacts a significant volume of business merely by virtue
of the resulting economic dependenceWhat are related party
transactions?A related party transaction is a transfer of
resources, services, or obligations between related parties,
regardless of whether a price is charged. [IAS
24.9]DisclosureRelationships between parents and
subsidiaries.Regardless of whether there have been transactions
between a parent and a subsidiary, an entity must disclose the name
of its parent and, if different, the ultimate controlling party. If
neither the entity's parent nor the ultimate controlling party
produces financial statements available for public use, the name of
the next most senior parent that does so must also be disclosed.
[IAS 24.16]Management compensation.Disclose key management
personnel compensation in total and for each of the following
categories: [IAS 24.17] short-term employee benefits
post-employment benefits other long-term benefits termination
benefits share-based payment benefitsKey management personnel are
those persons having authority and responsibility for planning,
directing, and controlling the activities of the entity, directly
or indirectly, including any directors (whether executive or
otherwise) of the entity. [IAS 24.9]Related party transactions.If
there have been transactions between related parties, disclose the
nature of the related party relationship as well as information
about the transactions and outstanding balances necessary for an
understanding of the potential effect of the relationship on the
financial statements. These disclosure would be made separately for
each category of related parties and would include: [IAS 24.18-19]
the amount of the transactions the amount of outstanding balances,
including terms and conditions and guarantees provisions for
doubtful debts related to the amount of outstanding balances
expense recognised during the period in respect of bad or doubtful
debts due from related partiesExamples of the kinds of transactions
that are disclosed if they are with a related party purchases or
sales of goods purchases or sales of property and other assets
rendering or receiving of services leases transfers of research and
development transfers under licence agreements transfers under
finance arrangements (including loans and equity contributions in
cash or in kind) provision of guarantees or collateral commitments
to do something if a particular event occurs or does not occur in
the future, including executory contracts (recognised and
unrecognised) settlement of liabilities on behalf of the entity or
by the entity on behalf of another party
