IAS 37

IFRS by numbers

Provisions, Contingent Liabilities and

IAS 37 Contingent Assets

Projects affecting IAS 37

General impact
Measurement and recognition
Linked publications

Projects affecting IAS 37

Expected Expected effective

Project affecting
Progress of project publication date of date of revised
Standard
revised Standard Standard
"Amendments to IAS 37" Exposure draft expected 2006 1 January 2007
in the 3rd quarter of 2005
"Business Combinations Exposure draft expected 2006 1 January 2007
Phase 2" (hereafter "BC in the 3rd quarter of 2005
2")
IFRIC D10 – “Liabilities Draft interpretation 2005 Periods beginning three
Arising from Participating issued 25 November months after the
in a Specific Market – 2004. finalisation of the
Waste Electrical and Comments to be interpretation (1)
Electronic Equipment” received by 11 February
2005

(1) Earlier application is encouraged.

General impact

Title of IAS 37

■ IAS 37 will be renamed “Provisions and contingent liabilities” because the requirements relating
to unconditional rights (which may lead to the recognition of assets) accompanying contingent
assets are not addressed in IAS 37 (IASB Update May 2004).

Measurement and recognition

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Constructive obligation - definition

● The definition of a "constructive obligation" will be amended to clarify that:

(a) an entity's actions must create a valid expectation in other parties such
that they can "reasonably rely" on the entity to discharge its
responsibilities. This is a change from the current requirement of a valid
expectation that the entity "will" discharge its responsibilities (IASB
Update December 2002).
(b) a constructive obligation requires an obligating event (IASB Update May
2004)

■ The concept of a constructive obligation should continue to include extra-legal obligations (i.e.
obligations other than promises that a court will enforce). The circumstances where extra legal
obligations may constitute a constructive obligation are expected to be very limited (IASB
Update October 2004).

Provisions

■ Two out of three recognition criteria for a provision in the current IAS 37 will be removed. The
first criterion, ‘an entity has a present obligation (legal or constructive) as a result of past event’
will be removed because the principles are embedded in the current definition of a provision (or
a liability). The second criterion, ‘it is probable that outflow of resources embodying economic
benefits will be required to settle the obligation’ will be removed because the criterion will
always be met when an item meets the current definition of a provision (IASB Update
September 2004).
■ Any item that satisfies the definition of a provision will therefore be recognised, unless its
amount cannot be measured reliably (IASB Update September 2004).
■ As for the measurement of provisions, it will be clarified that:

(a) provisions should be measured, both initially and subsequently, at the

amount that an entity would pay to settle or to transfer the present
obligation on the balance sheet date. The current IAS 37 does not
specifically address the subsequent measurement of provisions (IASB
Update October 2004);
(b) provisions should be measured using a current discount rate (IASB
Update May 2003) (IASB Update October 2004);
(c) the risks and uncertainties surrounding the obligation should be
considered when determining the amount that the entity would pay to
settle the obligation at the balance sheet date (IASB Update May 2004);

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(d) expected value estimation technique may be used because it is

consistent with the measurement principle whilst measuring provisions at
a single point estimate of the most likely outcome would not (IASB
Update October 2004); and
(e) Paragraphs 48 and 49 of IAS 37 will be withdrawn as they require having
‘sufficient objective evidence', which would imply measuring provisions at
a single point estimate of the most likely outcome (IASB Update October
2004);

Contingent liabilities - definition

■ The definition for a contingent liability will be amended to:

"A conditional obligation that arises from past events that may require an outflow of
resources embodying economic benefits based on the occurrence or non-occurrence of
one or more uncertain future events not wholly within the control of the entity" (IASB
Update March 2004).

■ The words 'conditional obligation' will replace 'possible obligation'. The words 'that may require
an outflow of resources embodying economic benefits based on' will replace 'and whose
existence will be confirmed only by'. Please refer to (IBN Chapter IFRS 3).
■ The definition for a contingent liability will no longer include a present obligation that arises from
past events but is not recognised.

Contingent assets - definition

■ The definition of a contingent asset, will be amended to:

"A conditional right that arises from past events from which future economic benefits may
flow based on the occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the entity" (IASB Update March 2004).

The words 'conditional rights' will replace ‘possible asset. The words 'from which future
economic benefits may flow based on' will replace 'and whose existence will be
confirmed only by'. Please refer to (IBN Chapter IFRS 3).

Provisions for restructuring costs

■ The existing guidelines on restructuring provisions (IAS37.70-83) will be withdrawn (IASB

Update December 2002);
■ The existence and announcement of a restructuring plan does not in itself create a restructuring

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obligation (IASB Update December 2002);

■ The cost of employee termination benefits should be recognised in accordance with IAS 19
(IASB Update December 2002);
■ The liability for costs that will continue to be incurred under a contract for its remaining term
without economic benefit to the entity should be recognised in accordance with the
requirements for onerous contracts (IASB Update December 2002);
■ When a contract becomes onerous as a result of the entity’s own actions, the resulting provision
should not be recognised until that action has occurred (IASB Update May 2003);
■ The provision for the unavoidable lease commitment (for an operating lease) should be reduced
by the sublease rentals that could reasonably be obtained for the property (IASB Update May
2003).

Reimbursements

■ IAS 37.54 will be amended to clarify that a right to a reimbursement should be disclosed
separately as an asset and not offset against the related provision.

IFRIC D10 - "Liabilities arising from Participating in a Specific Market - Waste Electrical and
Electronic Equipment"

■ This draft interpretation is developed in the context of the EU Directive on waste electrical and
electronic equipment. The Directive requires the costs of waste management relating to
equipment supplied to private households prior to 13 August 2005 to be borne by those
producers active in the market when those costs are incurred.
■ D10 proposes that participating in the market in a measurement period i.e. a period in which
market shares are determined for the purpose of allocating the waste costs, is the obligating
event (IFRIC Update July 2004) (IFRIC Update September 2004) (IFRIC D10.7);
■ The scope will not be expanded to include other issues raised by the EU directive (IFRIC
Update April 2005);
■ The Basis for Conclusions will be amended to: (IFRIC Update April 2005);

(a) specify that IAS 8 hierarchy should be applied to the circumstances not
covered by D10;
(b) encourage disclosure of the potential impact of the entity’s waste
management responsibilities as set out in relevant national legislation;
and
(c) clarify that terms such as ‘market share’ or ‘measurement period’ can be
defined differently in the applicable the national legislation of each EU
Member State and that this affects only the measurement of the liability,
which is not within the scope of D10.

■ The interpretation is approved by the IFRIC for issuance subject to editorial changes and the

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IASB’s approval (IFRIC Update April 2005).

Linked publications

■ Applying IFRS – Provisions

© 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network

of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity.

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