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IFRS amendments to IAS 37

IFRS amendments to IAS 37

IFRS amendments to IAS 37 : The Conceptual Framework defines liabilities. IAS 37 Provisions, Contingent Liabilities and Contingent Assets deals with when, or if, liabilities should be recognised as a result of some of the less certain events that an entity might be associated with, such as being a party of a lawsuit or having some responsibility for environmental remediation.

The IASB proposed revisions to the requirements of IAS 37 in 2005, and later presented revised proposals in 2010. However, IAS 37 was not revised.

Work on Liabilities—amendments to IAS 37 was moved to the research programme in 2012 while the IASB re-focused its efforts on reviewing the definition of a liability as part of the Conceptual Framework project.

Within the research programme, the work has focused on identifying examples that are continuing to cause difficulty in practice, to provide test cases for elements, recognition and measurement chapters of the Conceptual Framework.

During this research phase we are also assessing how and when IAS 37 could be revised or replaced, given the feedback on the earlier Exposure Drafts and the Conceptual Framework analysis.

In 2015 we plan to discuss in public IASB meetings how IAS 37 could be revised or replaced in the light of the likely revisions to the Conceptual Framework.

IFRS amendments to IAS 37

IFRS amendments to IAS 37

IFRS amendments to IAS 37

International Accounting Standard 37: Provisions, Contingent Liabilities and Contingent Assets, or IAS 37, is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It sets out the accounting and disclosure requirements for provisions, contingent liabilities and contingent assets, with several exceptions,establishing the important principle that a provision is to be recognized only when the entity has a liability.

IAS 37 was originally issued by the International Accounting Standards Committee in 1998, superseding IAS 10: Contingencies and Events Occurring after the Balance Sheet Date, and was adopted by the IASB in 2001. It was seen as an “important development” in accounting as it regulated the use of provisions, minimising their abuse such as in the case of big baths.

IFRS amendments to IAS 37

IAS 37 prescribes the accounting and disclosure for all provisions, contingent
liabilities and contingent assets, except:
(a) those resulting from financial instruments that are carried at fair value;
(b) those resulting from executor contracts, except where the contract is onerous. Executor contracts are contracts under which neither party has performed any of its obligations or both parties have partially
performed their obligations to an equal extent.
(c) those arising in insurance entities from contracts with policyholders; or
(d) those covered by another Standard.

The Standard defines provisions as liabilities of uncertain timing or amount.
A provision should be recognised when, and only when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event.
(b) it is probable (ie more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation.
(c) a reliable estimate can be made of the amount of the obligation. The Standard notes that it is only in extremely rare cases that a reliable estimate will not be possible.

IFRS amendments to IAS 37

The Standard defines a constructive obligation as 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.

IFRS amendments to IAS 37

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In these 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 end of the reporting period. An entity recognises a provision 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 discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, in other words, the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party
at that time.

IFRS amendments to IAS 37

The Standard requires that an entity should, in measuring a provision:
(a) take risks and uncertainties into account. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities.
(b) discount the provisions, where the effect of the time value of money is material, using a pre-tax discount rate (or rates) that reflect(s) current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense.
(c) take future events, such as changes in the law and technological changes, into account where there is sufficient objective evidence that they will occur.
(d) not take gains from the expected disposal of assets into account, even if the expected disposal is closely linked to the event giving rise to the provision.

IFRS amendments to IAS 37

An entity may expect reimbursement of some or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). An entity should:
(a) recognise a reimbursement when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised for the reimbursement should not exceed the amount of the provision.
(b) recognise the reimbursement as a separate asset. In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

IFRS amendments to IAS 37

Provisions should be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. A provision should be used only for expenditures for which the provision was originally recognised.

IFRS amendments to IAS 37: Provision

IAS 37 establishes the definition of a provision as a “liability of uncertain timing or amount”, and requires that all the following conditions be fulfilled before a provision can be recognised:

  1. the entity currently has a liability as a result of a past event;
  2. an outflow of resources is likely to be needed to settle the liability; and
  3. the amount of the obligation can be estimated reliably.

The standard also details measurement methods for provisions, generally requiring that the entity recognises a best estimate of the amounts needed to settle the obligation.

Contingent assets and liabilities IAS 37 generally defines contingent assets and liabilities as assets and liabilities that arose from past events but whose existence will only be confirmed by the occurrence of future events that are not in the entity’s control. It establishes that contingent assets and liabilities are not to be recognised in the financial statements, but are to be disclosed where an inflow of economic benefits is probable (assets) or the chance of outflows of resources is not insignificant (liabilities).

IFRS amendments to IAS 37: Recent and proposed amendments

In 2010 the IASB released an exposure draft of amendments to IAS 37 and invited comments on the draft. As of April 2012, the project has been paused pending other discussions. The amendments were controversial for setting out rules on how entities would account for legal cases in their financial statements; it would require firms to recognise the contingent liability as a weighted average of the possible outcomes of a legal case.

For More Details you can check out this below link:

IFRS – IAS 37 Provisions,Contingent Liabilities and Contingent Assets   ——–>  IAS37

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