IAS 37 - Provision

• Provision


  Liability of uncertain timing or amount
• Provision recognition


  1. Entity has a present obligation (legal or constructive) as a result of a past event

  2. It is probable that there will be an outflow of resources

  3. A reliable estimate can be made of the amount
• Constructive Obligation


  Entity's past practice or published policies creates a valid expectation amongst other parties that it will discharge certain responsibilities
• Constructive Obligation


  • Retail store operates a policy of giving refunds to customers that goes beyond the company's legal obligations
• Legal Obligation


  Arises from a contract or from laws and legislation
• Legal Obligation


  • Warranty, fines and penalty
• Probable


  In practical terms this means that there is a greater than 50% chance that an entity will have to transfer resource to another party
• Best estimate of a provision

  • The most likely amount payable for a single obligation (court case)
  • An expected value for a large population of items (such as a warranty provision)
• Measurement and subsequent measurement of provisions

  1. Provisions are measured at the best estimate of the obligation

  2. If the effect of the time value of money is material, then the provision should be discounted to present value, using a pre-tax rate

  3. If a provision has been discounted to present value, then the discount must be unwound and presented in finance costs
• Onerous Contract


  A contract in which the unavoidable costs of meeting the contract exceed the economic benefits expected to be received under it
• Measurement of provision for onerous contract

  Provision for onerous contract is measured at the lower of: The cost of fulfilling the contract; or The cost of terminating it and suffering any penalties
• No provision is required for future operating losses and future repairs to assets because it related to future and past events. The future cost also avoidable
• Restructuring


  A programme that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity; or the manner in which that business is conducted
• Restructuring


  • Sale or termination of a line of business, changes in management structure and closure of business activities
• Provision for restructuring


  1. A provision may only be made if: A detailed, formal and approved plan exists; and The plan has been announced to those affected

  2. A provision should include only the direct expenditures arising from the restructuring

  3. Excludes indirect costs, for example retraining, marketing or relocating staff in a continuing operation. Provisions for future losses of the restructured operation are also not permitted, unless they relate to onerous contracts
• Decommissioning Cost


  These decommissioning costs should be provided for at the date of the obligating event
• Contingent Liabilities


  Arises where a past event may lead to an entity having a liability in the future but the financial impact of the event will only be confirmed by the outcome of some future event not wholly within the entity's control
• Accounting for Contingent Liabilities

  1. Contingent Liabilities should not be recognised in the statement of financial position

  2. Contingent Liabilities should be disclosed in a note unless the possibility of a transfer of economic benefits is remote

  3. If an outflow of economic benefits becomes probable then contingent liabilities are reclassified as provisions
• Contingent Asset


  Potential asset that arises from past events but whose existence can only be confirmed by the outcome of future events not wholly within an entity's control
• Accounting for Contingent Assets

  1. Contingent Assets should not generally be recognised, but if the possibility of inflows of economic benefits is probable, they should be disclosed

  2. If a gain is virtually certain, it falls within the definition of an asset and should be recognised as such, not as a contingent asset