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IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets: Provisions Provisions can be distinguished from other liabilities (e.g. trade payables and accruals) due to the uncertainty concerning the timing or amount of the future expenditure required in settlement. In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within IAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognised because their 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. IAS 37 requires a provision be recognised when all of the following apply:

  • an entity has a present obligation (legal or constructive) as a result of a past event • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
  • a reliable estimate can be made of the amount of the obligation Provisions are measured at the best estimate of the expenditure required to settle the present obligation at the reporting period:
  • including any considerations for risks and uncertainties
  • including time value of money (if material)
  • including future events when there is sufficient objective evidence that they will occur
  • excluding gains from the expected disposal of assets Provisions are to be reviewed at the end of each reporting period and adjusted to reflect the current best estimate.

The provision is reversed where it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation. A provision is used only for expenditures for which the provision was originally recognised; i.e. only expenditures that relate to the original provision are set against it. When some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised as a separate asset when, and only when, it is virtually certain that the reimbursement will be received if the entity settles the obligation.

The maximum amount recognised as an asset is the amount of the provision. IAS 37 stipulates that:

  • A provision must not be recognised for future operating losses;
  • If an entity has a contract that is onerous, the present obligation under the contract is recognised and measured as a provision
  • A provision for restructuring costs can only be recognised if specific present obligation requirements are satisfied (e.g. details formal plan and the entity has raised a valid expectation in those affected).

 

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets

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.
  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.

 

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets

The objective of this Standard 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 enable users to understand their nature, timing and amount.

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets -IAS 37 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets, except:

  1. Those resulting from financial instruments that are carried at fair value;
  2. 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;
  3. Those arising in insurance entities from contracts with policyholders; or
  4. Those covered by another Standard. Provisions A provision is a liability of uncertain timing or amount. Recognition A provision should be recognised when:
    1. an entity has a present obligation (legal or constructive) as a result of a past event.
    2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
    3. A reliable estimate can be made of the amount of the obligation.

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets

If these conditions are not met, no provision shall be recognised. In rare cases it is not clear whether there is 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. Measurement The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

The best estimate of the expenditure required to settle the present obligation is 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.

Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability.

However, even in such a case, the entity considers other possible outcomes. Contingent liabilities A contingent liability is:

  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:
    1. That is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
    2. 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.

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets- Contingent assets 

A contingent asset is 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 entity shall not recognise a contingent asset. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets- If you are seeking for more information regarding IAS 37 its  Provisions,Contingent Liabilities and Contingent Assets than you can go to the link below and get the pdf for more information .

IFRS Evaluation of IAS 37 Provisions Contingent Liabilities and Contingent Assets

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