Chapter 7 Provisions Contingent Liabilities and Contingent assets

Chapter 7 Provisions, Contingent Liabilities and Contingent assets IMAS 1

IAS 37 A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits IMAS 2

Recognition of a liability A provision should be recognised when: van entity has a present obligation (legal or constructive) as a result of a past event vit is probable that an outflow of resources embodying economic benefits will be required to settle the obligation (The outflow of resources must be considered to be more likely than not, and) va reliable estimate can be made of the amount of the obligation. If any one of these conditions is not met, no provision may be recognised. *Where there a number of similar obligations, probability is assessed across the entire class of obligations rather than individually. IMAS 3

Obligations The obligation can be: vlegal, i. e. arising from § a contract § legislation other operation of law vconstructive, i. e. the entity has created a valid expectation via § established pattern of past practice § published policy or statement IMAS 4

Reliable estimate The standard states that situations in which a reliable estimate cannot be made should be rare. The estimate should be: vthe best estimate of likely outflow va prudent estimate vdiscounted when time value of money is material IMAS 5

Specific application v. Provisions cannot be made for future operating losses – as they do not meet the definition of a liability (they are an expectation rather than an obligation) v. An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits exp ected to be received under it. A provision is required for the 'least net cost' of exiting the contract, which is the lower of: vcost of fulfilling the contract vany compensation/penalties payable for failing to fulfil it IMAS 6

Restructuring A restructuring is a programme planned and controlled by management that materially changes the scope of business undertaken or the manner in which that business is conducted. A provision can only be made if: vthe entity has a detailed formal plan, and vhas raised a valid expectation in those affected that it will carry out the restructuring by – starting to implement it, or – announcing it Provision can then only be made for costs that are: vnecessarily entailed by the restructuring, and vnot associated with the ongoing activities of the entity. ***Costs specifically not allowed include retraining/relocation of existing staff, marketing and investment in new systems IMAS 7

Contingent liability va possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity, or va present obligation that arises from past events but is not recognised because: § it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or § the amount of the obligation cannot be measured with sufficient reliability. IMAS 8

Accounting for a contingent liability A contingent liability is: vnot recognised vdisclosed in a note, unless the possibility of outflow is remote IMAS 9

Contingent asset vis a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity. IMAS 10

Accounting A contingent asset is: vnot recognised vdisclosed in a note, if an inflow is considered probable. IMAS 11

Disclosures required for contingent liabilities and assets v. Description of nature of contingent liability/asset v. An estimate of its financial effect v. An indication of uncertainties relating to amount or timing of outflow/inflow v. For contingent liabilities, the possibility of any reimbursement IMAS 12

Summary Degree of probability of an outflow/inflow of resources Liability Asset Virtually certain Recognise Probable Make a provision Disclose by note Possible Disclose by note No disclosure Remote No disclosure IMAS 13