IAS 37 : PROVISIONS,

CONTINGENT
LIABILITIES AND
CONTINGENT
ASSETS
L U, DANI CA J ANE N.
OBJECTIVE
To ensure that:
• appropriate recognition criteria and measurement
bases are applied to provision, contingent liabilities
and contingent assets

• that sufficient information is disclosed in the notes

to enable users to understand their nature, timing
and amount.
SCOPE
IAS 37 shall be applied by all entities in accounting
for provisions, contingent liabilities and contingent
assets, except:

• resulting from executory contracts, unless they are

onerous.

• covered by another Standard

DEFINITIONS
Provision – a liability of uncertain timing or amount

Liability – 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.

Obligating Event – an event that creates a legal or

constructive obligation that results in an entity having
no realistic alternative to settling that obligation.
DEFINITIONS
Legal Obligation – an obligation that derives from a
contract, legislation or other operation of law.

Constructive Obligation – an obligation that derives

from an entity’s actions where:
a) By an established pattern of past practice, published
policies or a sufficiently specific current statement, the
entity has indicated to other parties that it will accept certain
responsibilities.
b) As a result, the entity has created a valid expectation on the
part of those other parties that it will discharge those
responsibilities
DEFINITIONS
Contingent Liability
• A possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
• A present obligation that arises from past events but is not recognized
because:
a) It is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.
b) The amount of the obligation cannot be measured with sufficient
reliability.
Contingent Asset – a possible asset that arises from past
events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
DEFINITIONS
Onerous Contract – a contract in which the
unavoidable costs of meeting the obligations
under the contract exceed the economic benefits
expected to be received under it.

Restructuring – a programme that is planned and

controlled by management and materially changes
either:
• The scope of a business undertaken by an entity
• The manner in which that business is conducted
PROVISIONS
PROVISIONS
Recognized when:
a) An entity has a present obligation(legal or constructive)
as a result of a past event.

b) It is probable that an outflow of resources embodying

economic benefits will be required to settle the obligation

c) A reliable estimate can be made of the amount of the

obligation
PROVISIONS
• Disclosure
1. Details of the change in carrying value of a provision from
the beginning to the end of the year.
a) The carrying amount at the beginning and end of the
period
b) Additional provisions made in the period, including
increases to existing provisions
c) Amounts used during the period
d) Unused amounts reversed during the period
e) The increase during the period in the discounted amount
arising from the passage of time and the effect of any
change in the discount rate.
PROVISIONS
• Disclosure
2. The background to the making of the provision and the
uncertainties affecting its outcome.:
a) A brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic
benefits;
b) An indication of the uncertainties about the amount or
timing of those outflows. Where necessary to provide
adequate information, an entity shall disclose the major
assumptions made concerning future events
c) The amount of any expected reimbursement, stating the
amount of any asset that has been recognized for that
expected reimbursement.
MEASUREMENT
Best Estimate
• The amount recognized as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the end of the
reporting period.
• The estimates are determined by the judgement of the entity’s management
supplemented by the experience of similar transactions.
Risk and Uncertainties
• The risk and uncertainties in the many events that involves the provisions
shall be taken into account in reaching the best estimate of a provision.
Present Value
• The amount of a provision shall be the present value of the expenditures
expected to be required to settle the obligation.
• The discount rate shall be a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the liability.
MEASUREMENT
• Future Events
 Future events which are expected to occur may affect the
amount required to settle the entity’s obligation and should
be taken into account.

• Expected Disposal of Assets

 Gains on the expected disposal of assets are not taken
into account in measuring a provision.
REIMBURSEMENTS
• Some or all of the expenditure needed to settle provision
may be expected to be recovered from a third party.
• In situations like that, reimbursement should be recognized
only when it is virtually certain that reimbursement will be
received if the entity settles the obligation.

• It should be treated as a separate asset.

• The amount recognized should not be greater than the
amount of the provision.
• The provision and the amount recognized for
reimbursement may be netted off in profit or loss.
CHANGES IN
PROVISIONS
• Provisions should be reviewed at the end of
each reporting period and adjusted to reflect the
current best estimate.

• If it is no longer probable that a transfer of

resources will be required to settle the
obligation, the provision should be reversed.
USE OF PROVISIONS
• Provisions shall be used only for expenditures
for which the provision was originally
recognized.

• Setting expenditures against a provision that

was originally recognized for another purpose
would conceal the impact of two different
events.
APPLICATION OF THE
RECOGNITION AND
MEASUREMENT RULES
• Future Operating Losses
 Provisions should not be recognized for future operating
losses.
 They do not meet the definition of a liability and the
general recognition criteria set out in the standard

• Onerous Contracts
 If an entity has a contract that is onerous, the present
obligation under the contract should be recognized and
measured as a provision.
APPLICATION OF THE
RECOGNITION AND
MEASUREMENT RULES
• Restructuring
• The followings are examples of events that fall under the
definition of restructuring:
 The sale or termination of a line of business

 The closure of business locations in a country or region or the

relocation of business activities from one country or region to
another

 Changes in management structure

 Fundamental reorganizations that have a material effect on the

nature and focus of the entity’s operations.
APPLICATION OF THE
RECOGNITION AND
MEASUREMENT RULES
• Restructuring
• A constructive obligation to restructure arises only when:
 An entity has detailed formal plan for the restructuring.
 An entity has a raised valid expectation in those affected
that it will carry out the restructuring by starting to
implement that plan or announcing its main features to
those affected by it.

• A restructuring provision should include only the direct

expenditures arising from the restructuring, which are:
 Necessarily entailed by the restructuring
 Not associated with the on-going activities of the entity
APPLICATION OF THE
RECOGNITION AND
MEASUREMENT RULES
• Restructuring
• The following costs should not be included within a
restructuring provision.
 Retraining or relocating continuing staff
 Marketing
 Investment in new systems and distribution networks
CONTINGENT LIABILITIES
AND CONTINGENT ASSETS
CONTINGENT
LIABILITIES
• An entity shall not recognize a contingent liability
• Unless the possibility of an outflow of resources
embodying economic benefit is remote, the entity
should disclose the contingent liability at the end
of the reporting period.
• A brief description of the nature of the contingent
liability must be provided:
a) An estimate of its financial effect
b) An indication of the uncertainties relating to the amount or
timing of any outflow
c) The possibility of any reimbursement
CONTINGENT ASSETS
An entity shall not recognize a contingent asset
• Why?
Contingent assets are not recognized in financial statements since
this may result in the recognition of income that may never be
realized. However, when realization of income is virtually certain,
then the related asset is not a contingent asset and its recognition
is appropriate.

A contingent asset is disclosed where an inflow of

economic benefits is probable. So, a brief description
of the nature of the contingent asset should be
provided along with an estimate of its financial effect.
QUESTIONS
1. A contingent liability is a possible obligation that arises from past
events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity.
a) True
b) False

2. Identify the wrong condition. A provision shall be recognized as a

liability when:
a) An entity has a present obligation as a result of past event
b) A reliable estimate can be made of the amount of the obligation
c) It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.
d) None of the above
QUESTIONS

3. An entity shall recognize a contingent liability?

a) True
b) False

4. An entity shall disclose for each class of contingent liability at the end of the
reporting period, unless?
c)The possibility of any outflow in settlement is remote
d)There is an estimate of its financial effect
e)There is an indication of uncertainties relating to the amount or timing of any outflow
f)The possibility of any reimbursement is probable
QUESTIONS

5. If it is no longer probable that a transfer of resources will

be required to settle the obligation, the provision should be
recognized. True or False? If false encircle the correct word
below:
a)True
b)Reversed
c)Recycled
d)Disclosed