PAS 37: Provision, Contingent Liability and Asset

Provision: is an existing liability of uncertain timing or uncertain amount. It may be equivalent

of an estimated liability or a loss contingency that is accrued because it is both probable &
measurable.

Recognition of provision
A provision is recognized when all of the following conditions are met:
a. The entity has a present obligation (legal or constructive) resulting from a past
event;
b. It is probable that an outflow of resources embodying economic benefits will be
required for settlement; and
c. The amount can be reliably estimated.

Present Obligation
- It may be legal or constructive.
- Legal Obligation: It is an obligation arising from a contract, legislation, or other
operation of law.
- Constructive Obligation: is an obligation that is derived from an entity’s action where:
A. Entity has indicated to other parties will accept certain responsibilities by reason of an
established pattern of past practice.
B. As a result, the entity has created a valid expectation on the part of other parties that it
will discharge those responsibilities.
Past Event
- Obligating Event: past event that leads to a present obligation. It creates a legal or
constructive obligation because the entity has no realistic alternative but to settle the
obligation.
- An accounting provision cannot be created in anticipation of a future event

Probable outflow of economic benefits

- An outflow of resources is regarded as probable if the event is more likely than not to
occur.
- Probable: more than 50% likely
- Possible: 50% or less likely
- Remote: 10% or less likely

Reliable estimate
- Use of estimates is an essential part of the preparation of fs
- A provision is more uncertain that most items in the SFP
- Using a range of possible outcomes, an entity would be able to make an estimate of the
obligation that is sufficiently reliable
- Where no reliable estimate can be made, no liability is recognized

Contingent Liabilities
These do not meet all of the recognition criteria.
  A possible obligation whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events; or
 A present obligation but:
 It is not probable that it will cause an outflow in its settlement; or
 Its amount cannot be reliably estimated.

Contingent Assets
- These are not recognized because they do not meet all of the asset recognition criteria.
Contingent assets are disclosed only, if the inflow of economic benefits is probable.

Measurement of provision
Provisions are measured at the best estimate of the amount needed to settle them at the end of
the reporting period.
 If the provision being measured involves a large population of items, it is
measured at its expected value, which is the amount computed by weighing all
possible outcomes by their associated probabilities.
 If there is a continuous range of possible outcomes, and each point in the range is
likely to happen, the mid-point of the range is used.

Measurement considerations
1. Risks & uncertainties
- Risks describes variability of outcome
- Risk adjustment may increase the amount at which a liability is measured
- Prudence: caution
- Uncertainty does not justify the creation of excessive provision
2. Present value of obligation
- Effect of the time value of money is material, the amount of provision shall be the PV
- Discount rate should be pretax rate that reflects the current market assessment
3. Future events
- It affect the amount required to settle an obligation shall be reflected in the amount of a
provision where there is a sufficient evidence that they will occur
4. Expected disposal of assets
- Gains from expected disposal of assets shall not be taken into account in measuring a
provision
- An entity shall recognize gain on disposal at the time of the disposal of assets
5. Reimbursements
- It shall be recognized when it is virtually certain that reimbursement would be received if
the entity settles the obligation.
- Treated as a separate asset & not settled against the estimated liability for the provision
- Amount of reimbursement shall not exceed the amount of provision
6. Changes in provision
- Provisions shall be renewed at every end of the reporting period & adjusted to reflect the
current best estimate
- Provision shall be reversed if it is no longer probable that an outflow of economic
benefits would be required for the obligation
 7. Use of provision
- It shall be used for only expenditures for which the provision was originally recognized
8. Future operating losses
- Provisions shall not be recognized for future operating losses because a past event
creating a present obligation has not occurred
9. Onerous contract
- It is a contract in which the unavoidable costs of meeting the obligation under the
contract exceed the economic benefits expected to be received under it.
- If an entity has this, the present obligation under the contract shall be recognized &
measured as a provision
- Unavoidable costs under a contract represent the least net cost of exiting from the
contract

Examples of provision
1. Warranties
2. Environmental contamination
3. Decommissioning or abandonment costs
4. Court case
5. Guarantee