IAS 37 – Provisions, Contingent

Assets and Liabilities

By: Hamza Abdul Haq
Identifying Liability Nature

Chances Inflow Outflow

Virtually Certain Asset Liability
Probable Disclosure Provision
Possible Do Nothing Disclosure
Remote Do Nothing Do Nothing
Overview
1. IAS 37 is applies when there is uncertainty with respect to the outcome.
2. The company should record the value in the financial statements at its best
estimate. Best estimate incorporates the risk and uncertainty by incorporating
expected values.
3. The liability shall be recorded at present value if material using the ‘pre-tax risk
adjusted’ discount factor.
4. Inflows and outflows are dealt separately.
5. Liability is recorded when the outflow is virtually certain and the amount is
known
6. Provision is recorded when the outflow is at-least probable and the amount
can be measured reliably.
7. Otherwise the liability is at least disclosed.
Types of Provisions

1. Litigation (Law suit)

2. Asset Retirement
3. Onerous Contract
4. Restructuring
5. Warranty

Note: Provision relating to future operating losses is not recognised.

Asset Retirement

1. Dismantling cost is capitalised in the cost of the asset at its

present value.
2. And depreciated along with the asset.
3. The liability is unwound at each year end.
Onerous Contract

1. Onerous contract is a contract that is expected to result in an

unavoidable loss.
2. Provision shall be recorded immediately from the date the loss is
expected.
3. Provision is recorded at the lowest loss option (If multiple options
are available).
Restructuring
Restructuring

Redundancy Onerous Contract Retraining Relocation

Provision is recorded if Expensed when the

criteria’s are met cost is incurred.

 Detailed formal plan is prepared and approved.

 Publically announced (Announced to affected
parties).
Dec 2012 – Q3 Blackcutt (c)
Answer to Dec 2012 – Q3 Blackcutt (c)
(1) The announcement of the national government creates an obligation on
Blackcutt to the incur the cleaning costs due to the chemicals storage and (2) as the
cost is uncertain, it shall be accounted for under IAS 37.
(3) Under IAS 37, provision is recorded if the outlfow is atleast probable and the
amount can be measured reliably. In this case both the criteria's seems to be met.
therefore Blackcutt shall treat the estimated amount as an expense and as a
provision (liability).
(4) Further as Balckcutt cannot recover the amount from its insurers or from
Chemco, it shall not record a receivable from any of them as Blackcutt does not the
right to receive cash.
June 2011 – Q2 Lockfine (d)
Answer to June 2011 – Q2 Lockfine (d)
All accounting for restricting is dealt under IAS 37, where provision for restructuring is
recorded if two ctriteria’s are met:
 Detailed formal plan is prepared and approved
 The plan is publically announced (Announced to affected parties or their representatives).
In case of Plan A, Lockfine has to carry out further analysis therefore the first criteria is not
met and in the announcement, lockfine had suggested that it may restructure therefore the
constructive obligation has not arose on Lockfine. Therefore no provision shall be recorded
for Plan A.
In case of Plan B, provision will be recorded as both of the criteria’s are met. Although the
negotiations with the employee representative was not completed by the year end but as per
IAS 10, we should treat it as an adjusting events on the basis that almost all of the
negotiations would have been completed by the year end.
Dec 2010 – Q3 Greenie (a)
Answer to Dec 2010 – Q3 Greenie (a)
As legal action has been taken against greenie, the outcome of the legal action is uncertain
along with the amount for which greenie may be liable, therefore such outflow shall be
accounted for in accordance to IAS 37.
Greenie should record a provision only if the outflow is probable and the amount can be
measured reliably. But as the expert report is expected in 2011 and the nature and extent of
damages are yet to be established, the criteria’s of recognition of provision is not met.
However Greenie should at least disclose the outflow in its Financial Statements treating it as
a contingent liability. Further, no provision for operating losses can be recorded under IAS
37.
Compensation agreements have been arranged and are covered under the insurance policy
of greenie, but greenie shall not record this as an asset or a contingent asset as the
possibility of the insurance claim seems to be low as it also have some conditions attached.
This insurance will also have no impact on the liability disclosed in the financial statements.
Furthermore as the building of greenie is also damaged, greenie will also have to apply IAS
36 on it.
Dec 2007 – Q2 Macaljoy (b)
Answer to Dec 2007 – Q2 Macaljoy (b)
As Macaljoy has provided warranty to its customers, it should record a provision for the
expected cost to be incurred when the customer will claim for the warranty. Macaljoy should
record the provision at its best estimate which should incorporate the risk and uncertainty
through incorporating the expected values. Further as the customer can claim the warranty
during the next two years, the provision should be recorded at its present value, if material
and then should be unwound at each year end using the same discount factor.
Macaljoy has insured it’s self for the second year of warranty therefore Macaljoy should
disclose it as a contingent asset only if the cash inflow is probable otherwise shall not be
incorporated in the Financial Statements. The provision for the cash outflow recorded should
have no impact of the insurance as these are separate contracts and cannot be offset.
Provisions are recorded in the financial statements if the outflow is probable and the amount
can be measured reliably. In case of Macaljoy both the criteria’s are met based on the past
experience.
June 2013 – Q1 Trailer (Adj 6)
Thank You 