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IFRS Reserves Definition Recognition and Measurement

IFRS Reserves Definition Recognition and Measurement

IFRS Reserves Definition Recognition and Measurement- 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 recognised 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.

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. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the end of the reporting period. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

The estimates of outcome and financial effect are determined by the judgement of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the end of the reporting period.

Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is ‘expected value’. The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used.

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. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. For example, if an entity has to rectify a serious fault in a major plant that it has constructed for a customer, the individual most likely outcome may be for the repair to succeed at the first attempt at a cost of 1,000, but a provision for a larger amount is made if there is a significant chance that further attempts will be necessary.

 

IFRS Reserves Definition Recognition and Measurement

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 Reserves Definition Recognition and Measurement

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 Reserves Definition Recognition and Measurement -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 Reserves Definition Recognition and Measurement

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 Reserves Definition Recognition and Measurement- 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 Reserves Definition Recognition and Measurement- 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 Reserves Definition Recognition and Measurement

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