Notes on Nonfinancial Liabilities Part I

Provisions and Contingencies (IAS 37)

Provisions are liabilities of uncertain timing or amount.
They are recognized in the statement of financial position when and only when:
 An enterprise has a present obligation (legal or constructive) as a result of past events;
 It is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be
required to settle the obligations; and
 A reliable estimate can be made of the amount of the obligation
Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events and wholly within the control of the enterprise.
While provisions are recognized in the statement of financial position with disclosed information required, contingent
liabilities are only disclosed in the notes to the financial statements.
Provision = are measured reliably; probable (in terms of higher likeliness of economic benefits)
Contingent liability = cannot be measured reliably; possible (50/50 likeliness of economic benefits)

Circumstance Disposition

There is a present obligation that probably requires an A provision is recognized in the balance sheet along with
outflow of resources that can be measured reliably. its required disclosures.

There is a present obligation that probably requires an No provision is recognized. Instead, disclosures are made
outflow of resources but cannot be measured reliably. for a contingent liability.

There is a possible obligation or a present obligation that No provision is recognized. Instead, disclosures are made
may, but probably will not, require an outflow of for a contingent liability.
resources.

There is a possible obligation or a present obligation No provision is recognized and no disclosure is required.
where the likelihood of an outflow of resources is
remote.

Remote chance of liability = no chances of occurrence.

Note that if:
On year 1, the circumstance of the liability is that: there is a possible obligation or a present obligation where the
likelihood of an outflow of resources is remote.
On year 2, the circumstance of the same liability is that: there is a possible obligation or a present obligation that may, but
probably will not, require an outflow of resources.
and so on… the proper disclosures will be applied according to its appropriate disposition regardless of its historical
status.

Measurement of provisions when such amount is uncertain:

1. Best estimate
(may be through the best judgment of the lawyer, company, etc. depending on the circumstance)
(may be derived from similar provisions in the past)
(there is no accounting policy requiring a specific estimate)
2. Most likely outcome
3. Midpoint of the range [(higher limit + lower lower)/2]
If the estimate is from 500K to 1 million, the midpoint/provision would be 750K.
The 250K uncertainty (excess of higher limit and midpoint) will then be considered as the contingent
liability.

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Alcera, Vincent Luigil C.
 4. Present value of the expenditures
5. Actual settlement
If the provision is amounted to P500,000 at the end of the reporting period but was further settled at
P520,000 (or may be lower in other cases) in the subsequent period before the date of issuance of the
financial statements, we shall debit a loss and credit provisions (or its inverse) for the amount incurred
in its actual settlement. This may be done as long as the financial statements have yet to be issued. In
increase of the amount from the settlement is considered a loss whereas a decrease is considered a
gain.

We are still able to adjust because this is considered as an adjusting event (which must occur between
the end of the reporting period and the date of issuance of financial statements) according to IAS 10
Events after the End of the Reporting Period.
Example:

1. Adobo Company operates in a city where there is no environmental legislation. However, the company has a widely-
published policy in which it undertakes to clean-up all contaminations they cause. As of the date of issuance of 2019
financial statements, a reasonable estimate of this clean-up related to 2019 operations is P3,000,000. Provide the
entry to record the recognition of provision.

Loss from environmental clean-up 3,000,000

Provision for environmental clean-up 3,000,000

2. Tine, Inc. is being sued for illness caused to local residents as a result of negligence on the company’s part in
permitting the local residents to be exposed to highly toxic chemicals from its plant. Tine, Inc.’s lawyer states that it is
probable that Tine, Inc. will lose the suit and be found liable for a judgment costing Tine, Inc. anywhere from
P400,000 to P2,000,000. However, the lawyer states that the most probable cost is P1,200,000. As a result of the
given facts, Tine, Inc. should be? a provision of P1,200,000 and contingent liability of P800,000 (P2M-P1.2M)

In this problem, our provision will be the most probable cost rather than the midpoint because the most probable is
considered the best estimate.

Loss from negligence 1,200,000

Provision from negligence 1,200,000

3. Tine, Inc. is being sued for illness caused to local residents as a result of negligence on the company’s part in
permitting the local residents to be exposed to highly toxic chemicals from its plant. Tine, Inc.’s lawyer states that it is
probable that Tine, Inc. will lose the suit and be found liable for a judgment costing Tine, Inc. anywhere from
P400,000 to P2,000,000. As a result of the given facts, Tine, Inc. should be?

A provision of P1,200,000 from the midpoint [(P400K + 2M)/2] and contingent liability of P800,000.

Loss from negligence 1,200,000

Provision from negligence 1,200,000
(although the amounts are the same as the previous problem, each basis is different)

4. Tine, Inc. is being sued for violating the law. On December 31, 2020, Tine, Inc.’s lawyer states that it is probable that
Tine, Inc. will lose the suit and be found liable for a judgment costing Tine, Inc. for P500,000. On February 2021, the
court has already decided on the case and Tine settled P600,000. The financial statement for 2020 was issued on
March 31, 2021. As a result of the given facts, Tine, Inc. should be a provision on December 31, 2020 amounting
to?

The amount should be P600,000 (based on actual settlement that happened before the date of issuance of the 2020
Financial Statements)

Loss 100,000
Provision 100,000

作成した: 03-18-2021 終わった: 03-xx-2021

Alcera, Vincent Luigil C.
Unearned Revenues
Under IFRS 15, Revenues from contracts with customers is recognized by following the 5-step model:
Step 1: Identifying the contract with a customer.
Step 2: Identifying the performance obligations. (whether goods or services are to be delivered)
Step 3: Determining the transaction price.
Step 4: Allocating the transaction price to the performance obligations.
Step 5: Recognizing revenue when the entity satisfies the performance obligations.

Unearned revenues are amounts collected in advance that not yet earned and recorded as revenues only when the
performance obligations are already satisfied. Examples are collections in advance for magazine subscriptions, tickets, gift
certificates, etc.

A. Gift Certificates

 Gift certificates are vouchers given as a present that is exchangeable for a specified cash value of goods or
services from a particular place of business.
 They are considered as unearned revenue for the issuing companies.
 RA 10962: Gift Check Act of 2017 section 5 stated that issuing a gift check that bears expiration is considered as
unlawful act. (Note that for certain problems, they may allow expiration dates).
Gift certificates sold are earned when the tangible goods or services are purchased by customers.
Gift Certificate Outstanding, beg. P xx
Sold gift certificates during the period xx
Redeemed gift certificates xx
Expired gift certificates xx
Gift Certificate Outstanding, end. P xx
aa

作成した: 03-18-2021 終わった: 03-xx-2021

Alcera, Vincent Luigil C.