IFRS Disclosure of IAS 37 Provision Liabilities and Assets: Provisions

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 Disclosure of IAS 37 Provision Liabilities and Assets

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.

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.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets

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 IAS 37.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets

IFRS Foundation 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.

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.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets

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 Disclosure of IAS 37 Provision Liabilities and Assets

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; and
(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 Disclosure of IAS 37 Provision Liabilities and Assets

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.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets

Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an entity tests these assets for impairment under IAS 36 Impairment of Assets.

If an entity has a contract that is onerous, the present obligation under the contract should be recognised and measured as a provision. An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets

The Standard defines a restructuring as a programme that is planned and controlled by management, and materially changes either:
(a) the scope of a business undertaken by an entity.
(b) the manner in which that business is conducted.

A provision for restructuring costs is recognised only when the general recognition criteria for provisions are met. In this context, a constructive obligation to restructure arises only when an entity:

1. has a detailed formal plan for the restructuring identifying at least:
   (i) the business or part of a business concerned.
   (ii) the principal locations affected.
   (iii) the location, function, and approximate number of employees
   who will be compensated for terminating their services.
   (iv) the expenditures that will be undertaken.
   (v) when the plan will be implemented.
2. has raised a valid expectation in those affected that it will carry out the
   restructuring by starting to implement that plan or announcing its main
   features to those affected by it.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets

A management or board decision to restructure does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period:

1. started to implement the restructuring plan.
2.  communicated the restructuring plan to those affected by it in a
   sufficiently specific manner to raise a valid expectation in them that the
   entity will carry out the restructuring.

Where a restructuring involves the sale of an operation, no obligation arises for the sale until the entity is committed to the sale, ie there is a binding sale agreement.

A restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both:

1. necessarily entailed by the restructuring.
2. not associated with the ongoing activities of the entity.

Thus, a restructuring provision does not include such costs as: retraining or relocating continuing staff; marketing; or investment in new systems and distribution networks.

IFRS Disclosure of IAS 37 Provision Liabilities and Assets
Contingent liabilities

The Standard defines a contingent liability as:

1. A possible obligation 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;
2.  a present obligation that arises from past events but is not recognised
   because:
   (i) it is not probable that an outflow of resources embodying
   economic benefits will be required to settle the obligation; or
   (ii) the amount of the obligation cannot be measured with sufficient
   reliability.

An entity should not recognise a contingent liability. An entity should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent assets

The Standard defines a contingent asset as 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. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.

An entity should not recognise a contingent asset. A contingent asset 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.

Disclosure
For each class of provision, an entity shall disclose:

1. the carrying amount at the beginning and end of the period.
2. additional provisions made in the period, including increases to
   existing provisions.
3. amounts used (ie incurred and charged against the provision)
   during the period.
4. unused amounts reversed during the period.
5.  the increase during the period in the discounted amount arising
   from the passage of time and the effect of any change in the
   discount rate. Comparative information is not required.

An entity shall disclose the following for each class of provision:

1. a brief description of the nature of the obligation and the expected
   timing of any resulting outflows of economic benefits.
2. an indication of the uncertainties about the amount or timing of
   those outflows. Where necessary to provide adequate information,
   an entity shall disclose the major assumptions made concerning
   future events.
3. the amount of any expected reimbursement, stating the amount of
   any asset that has been recognised for that expected
   reimbursement.

Unless the possibility of any outflow in settlement is remote, an entity
shall disclose for each class of contingent liability at the end of the
reporting period a brief description of the nature of the contingent
liability and, where practicable:

1. an estimate of its financial effect.
2.  an indication of the uncertainties relating to the amount or
   timing of any outflow; and
3. the possibility of any reimbursement.

It is important that disclosures for contingent assets avoid giving misleading
indications of the likelihood of income arising.
Where any of the information required by paragraphs 86 and 89 is not
disclosed because it is not practicable to do so, that fact shall be stated.

In extremely rare cases, disclosure of some or all of the information
required by paragraphs 84–89 can be expected to prejudice seriously the
position of the entity in a dispute with other parties on the subject
matter of the provision, contingent liability or contingent asset.

In such cases, an entity need not disclose the information, but shall disclose the
general nature of the dispute, together with the fact that, and reason why,
the information has not been disclosed.