IAS 37 Provisions, Contingent Liabilities and Contingent Assets

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Overview
IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for
provisions (liabilities of uncertain timing or amount), together with contingent assets (possible
assets) and contingent liabilities (possible obligations and present obligations that are not
probable or not reliably measurable). Provisions are measured at the best estimate (including
risks and uncertainties) of the expenditure required to settle the present obligation, and
reflects the present value of expenditures required to settle the obligation where the time
value of money is material.
IAS 37 was issued in September 1998 and is operative for periods beginning on or after 1 July
1999.
History of IAS 37
August 1997 Exposure Draft E59 Provisions, Contingent Liabilities and Contingent
Assets
September 1998 IAS 37 Provisions, Contingent Liabilities and Contingent Assets
1 July 1999 Effective date of IAS 37 (1998)
30 June 2005 Exposure Draft of substantial revisions to IAS 37
Related Interpretations
o IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
o IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental
Funds
o IFRIC 6 Liabilities Arising from Participating in a Specific Market Waste Electrical and
Electronic Equipment
o IFRIC 17 Distributions of Non-cash Assets to Owners
o IFRIC 21 Levies
Amendments under consideration by the IASB
o Research project Non-financial liabilities
o Research project Discount rates
Summary of IAS 37
Objective
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to the financial statements to enable users to understand
their nature, timing and amount. The key principle established by the Standard is that a
provision should be recognised only when there is a liability i.e. a present obligation resulting
from past events. The Standard thus aims to ensure that only genuine obligations are dealt with
in the financial statements planned future expenditure, even where authorised by the board
of directors or equivalent governing body, is excluded from recognition.
Scope
IAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6]
o financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and
Measurement (or IFRS 9 Financial Instruments)
o non-onerous executory contracts
o insurance contracts (see IFRS 4 Insurance Contracts), but IAS 37 does apply to other
provisions, contingent liabilities and contingent assets of an insurer
o items covered by another IFRS. For example, IAS 11 Construction Contracts applies to
obligations arising under such contracts; IAS 12 Income Taxes applies to obligations for
current or deferred income taxes; IAS 17 Leases applies to lease obligations; and IAS
19Employee Benefits applies to pension and other employee benefit obligations; and .
Key definitions [IAS 37.10]
Provision: a liability of uncertain timing or amount.
Liability:
o present obligation as a result of past events
o settlement is expected to result in an outflow of resources (payment)
Contingent liability:
o a possible obligation depending on whether some uncertain future event occurs, or
o a present obligation but payment is not probable or the amount cannot be measured
reliably
Contingent asset:
o a possible asset that arises from past events, and
o 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.
Recognition of a provision
An entity must recognise a provision if, and only if: [IAS 37.14]
o a present obligation (legal or constructive) has arisen as a result of a past event (the
obligating event),
o payment is probable ('more likely than not'), and
o the amount can be estimated reliably.
An obligating event is an event that creates a legal or constructive obligation and, therefore,
results in an entity having no realistic alternative but to settle the obligation. [IAS 37.10]
A constructive obligation arises if past practice creates a valid expectation on the part of a third
party, for example, a retail store that has a long-standing policy of allowing customers to return
merchandise within, say, a 30-day period. [IAS 37.10]
A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is
not required if payment is remote. [IAS 37.86]
In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present
obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking
account of all available evidence, it is more likely than not that a present obligation exists at the
balance sheet date. A provision should be recognised for that present obligation if the other
recognition criteria described above are met. If it is more likely than not that no present
obligation exists, the entity should disclose a contingent liability, unless the possibility of an
outflow of resources is remote. [IAS 37.15]
Measurement of provisions
The amount recognised as a provision should be the best estimate of the expenditure required
to settle the present obligation at the balance sheet date, that is, the amount that an entity
would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third
party. [IAS 37.36] This means:
o Provisions for one-off events (restructuring, environmental clean-up, settlement of a
lawsuit) are measured at the most likely amount. [IAS 37.40]
o Provisions for large populations of events (warranties, customer refunds) are measured at a
probability-weighted expected value. [IAS 37.39]
o Both measurements are at discounted present value using a pre-tax discount rate that
reflects the current market assessments of the time value of money and the risks specific to
the liability. [IAS 37.45 and 37.47]
In reaching its best estimate, the entity should take into account the risks and uncertainties that
surround the underlying events. [IAS 37.42]
If some or all of the expenditure required to settle a provision is expected to be reimbursed by
another party, the reimbursement should be recognised as a separate asset, and not as a
reduction of the required provision, when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the obligation. The amount recognised
should not exceed the amount of the provision. [IAS 37.53]

In measuring a provision consider future events as follows:
o forecast reasonable changes in applying existing technology [IAS 37.49]
o ignore possible gains on sale of assets [IAS 37.51]
o consider changes in legislation only if virtually certain to be enacted [IAS 37.50]
Remeasurement of provisions [IAS 37.59]
o Review and adjust provisions at each balance sheet date
o If an outflow no longer probable, provision is reversed.
Some examples of provisions
Circumstance Recognise a provision?
Restructuring by sale
of an operation
Only when the entity is committed to a sale, i.e. there is a
binding sale agreement [IAS 37.78]
Restructuring by
closure or
reorganisation
Only when a detailed form plan is in place and the entity
has started to implement the plan, or announced its
main features to those affected. A Board decision is
insufficient [IAS 37.72, Appendix C, Examples 5A & 5B]
Warranty
When an obligating event occurs (sale of product with a
warranty and probable warranty claims will be made)
[Appendix C, Example 1]
Land contamination
A provision is recognised as contamination occurs for any
legal obligations of clean up, or for constructive
obligations if the company's published policy is to clean
up even if there is no legal requirement to do so (past
event is the contamination and public expectation
created by the company's policy) [Appendix C, Examples
2B]
Customer refunds
Recognise a provision if the entity's established policy is
to give refunds (past event is the sale of the product
together with the customer's expectation, at time of
purchase, that a refund would be available) [Appendix C,
Example 4]
Offshore oil rig must
be removed and sea
bed restored
Recognise a provision for removal costs arising from the
construction of the the oil rig as it is constructed, and add
to the cost of the asset. Obligations arising from the
production of oil are recognised as the production occurs
[Appendix C, Example 3]
Abandoned
leasehold, four years
to run, no re-letting
possible
A provision is recognised for the unavoidable lease
payments [Appendix C, Example 8]
CPA firm must staff
training for recent
changes in tax law
No provision is recognised (there is no obligation to
provide the training, recognise a liability if and when the
retraining occurs) [Appendix C, Example 7]
Major overhaul or
repairs
No provision is recognised (no obligation) [Appendix C,
Example 11]
Onerous (loss-
making) contract Recognise a provision [IAS 37.66]
Future operating
losses No provision is recognised (no liability) [IAS 37.63]
Restructurings
A restructuring is: [IAS 37.70]
o sale or termination of a line of business
o closure of business locations
o changes in management structure
o fundamental reorganisations.
Restructuring provisions should be recognised as follows: [IAS 37.72]
o Sale of operation: recognise a provision only after a binding sale agreement [IAS 37.78]
o Closure or reorganisation: recognise a provision only after a detailed formal plan is
adopted and has started being implemented, or announced to those affected. A board
decision of itself is insufficient.
o Future operating losses: provisions are not recognised for future operating losses, even in a
restructuring
o Restructuring provision on acquisition: recognise a provision only if there is an obligation
at acquisition date [IFRS 3.11]
Restructuring provisions should include only direct expenditures necessarily entailed by the
restructuring, not costs that associated with the ongoing activities of the entity. [IAS 37.80]
What is the debit entry?
When a provision (liability) is recognised, the debit entry for a provision is not always an
expense. Sometimes the provision may form part of the cost of the asset. Examples: included in
the cost of inventories, or an obligation for environmental cleanup when a new mine is opened
or an offshore oil rig is installed. [IAS 37.8]
Use of provisions
Provisions should only be used for the purpose for which they were originally recognised. They
should be reviewed at each balance sheet date and adjusted to reflect the current best
estimate. If it is no longer probable that an outflow of resources will be required to settle the
obligation, the provision should be reversed. [IAS 37.61]
Contingent liabilities
Since there is common ground as regards liabilities that are uncertain, IAS 37 also deals with
contingencies. It requires that entities should not recognise contingent liabilities but should
disclose them, unless the possibility of an outflow of economic resources is remote. [IAS 37.86]
Contingent assets
Contingent assets should not be recognised but should be disclosed where an inflow of
economic benefits is probable. When the realisation of income is virtually certain, then the
related asset is not a contingent asset and its recognition is appropriate. [IAS 37.31-35]
Disclosures
Reconciliation for each class of provision: [IAS 37.84]
o opening balance
o additions
o used (amounts charged against the provision)
o unused amounts reversed
o unwinding of the discount, or changes in discount rate
o closing balance
A prior year reconciliation is not required. [IAS 37.84]
For each class of provision, a brief description of: [IAS 37.85]
o nature
o timing
o uncertainties
o assumptions
o reimbursement, if any


IAS 10 Events After the Reporting Period
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Overview
IAS 10 Events After The Reporting Period contains requirements for when events after the end
of the end of the reporting period should be adjusted in the financial statements. Adjusting
events are those providing evidence of conditions existing at the end of the reporting period,
whereas non-adjusting events are indicative of conditions arising after the reporting period (the
latter being disclosed where material).
IAS 10 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005.
History of IAS 10
July 1977 Exposure Draft E10 Contingencies and Events Occurring After the
Balance Sheet Date
October 1978 IAS 10 Contingencies and Events Occurring After the Balance Sheet
Date effective 1 January 1980
1994 IAS 10 (1978) was reformatted
August 1997 Exposure Draft E59 Provisions, Contingent Liabilities and Contingent
Assets
September 1998 IAS 37 Provisions, Contingent Liabilities and Contingent Assets
1 July 1999 Effective date of IAS 37, which superseded those portions of IAS 10
(1978) dealing with contingencies
November 1998 Exposure Draft E63 Events After the Balance Sheet Date
May 1999 IAS 10 (1999) Events After the Balance Sheet Date superseded those
portions of IAS 10 (1978) dealing with events after the balance sheet
date
1 January 2000 Effective date of IAS 10 (1999)
18 December 2003 Revised version of IAS 10 issued by the IASB
1 January 2005 Effective date of IAS 10 (Revised 2003)
6 September 2007 Retitled Events after the Reporting Period as a consequential
amendment resulting from revisions to IAS 1
Related Interpretations
o None
Summary of IAS 10
Key definitions
Event after the reporting period: An event, which could be favourable or unfavourable, that
occurs between the end of the reporting period and the date that the financial statements are
authorised for issue. [IAS 10.3]
Adjusting event: An event after the reporting period that provides further evidence of
conditions that existed at the end of the reporting period, including an event that indicates that
the going concern assumption in relation to the whole or part of the enterprise is not
appropriate. [IAS 10.3]
Non-adjusting event: An event after the reporting period that is indicative of a condition that
arose after the end of the reporting period. [IAS 10.3]
Accounting
o Adjust financial statements for adjusting events - events after the balance sheet date that
provide further evidence of conditions that existed at the end of the reporting period,
including events that indicate that the going concern assumption in relation to the whole or
part of the enterprise is not appropriate. [IAS 10.8]
o Do not adjust for non-adjusting events - events or conditions that arose after the end of the
reporting period. [IAS 10.10]
o If an entity declares dividends after the reporting period, the entity shall not recognise
those dividends as a liability at the end of the reporting period. That is a non-adjusting
event. [IAS 10.12]
Going concern issues arising after end of the reporting period
An entity shall not prepare its financial statements on a going concern basis if management
determines after the end of the reporting period either that it intends to liquidate the entity or
to cease trading, or that it has no realistic alternative but to do so. [IAS 10.14]
Disclosure
Non-adjusting events should be disclosed if they are of such importance that non-disclosure
would affect the ability of users to make proper evaluations and decisions. The required
disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement
that a reasonable estimate of the effect cannot be made. [IAS 10.21]
A company should update disclosures that relate to conditions that existed at the end of the
reporting period to reflect any new information that it receives after the reporting period about
those conditions. [IAS 10.19]
Companies must disclose the date when the financial statements were authorised for issue and
who gave that authorisation. If the enterprise's owners or others have the power to amend the
financial statements after issuance, the enterprise must disclose that fact. [IAS 10.17]


IAS 24 Related Party Disclosures
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Overview
IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding
balances with an entity's related parties. The standard defines various classes of entities and
people as related parties and sets out the disclosures required in respect of those parties,
including the compensation of key management personnel.
IAS 24 was reissued in November 2009 and applies to annual periods beginning on or after 1
January 2011.
History of IAS 24
March 1983 Exposure Draft E25 Disclosure of Related Party Transactions
July 1984 IAS 24 Related Party Disclosures
1 January 1986 Effective date of IAS 24 (1984) Related Party Disclosures
1994 IAS 24 was reformatted
18 December 2003 Revised version of IAS 24 issued by the IASB
1 January 2005 Effective date of IAS 24 (2003)
February 2007 Exposure Draft of Proposed Amendments to IAS 24 issued Click forPress
Release (PDF 63k)
11 December 2008 Revised Exposure Draft of Proposed Amendments to IAS 24 issued Click
for Press Release (PDF 47k)
4 November 2009 Revised IAS 24 issued Click for Press Release (PDF 63k)
1 January 2011 Effective date of IAS 24 (2009)
Related Interpretations
o None
Amendments under consideration by the IASB
o None
Summary of IAS 24
Objective of IAS 24
The objective of IAS 24 is to ensure that an entity's financial statements contain the disclosures
necessary to draw attention to the possibility that its financial position and profit or loss may
have been affected by the existence of related parties and by transactions and outstanding
balances with such parties.
Who are related parties?
A related party is a person or entity that is related to the entity that is preparing its financial
statements (referred to as the 'reporting entity') [IAS 24.9].
o (a) A person or a close member of that person's family is related to a reporting entity if that
person:
o (i) has control or joint control over the reporting entity;
o (ii) has significant influence over the reporting entity; or
o (iii) is a member of the key management personnel of the reporting entity or of a
parent of the reporting entity.
o (b) An entity is related to a reporting entity if any of the following conditions applies:
o (i) The entity and the reporting entity are members of the same group (which means
that each parent, subsidiary and fellow subsidiary is related to the others).
o (ii) One entity is an associate or joint venture of the other entity (or an associate or
joint venture of a member of a group of which the other entity is a member).
o (iii) Both entities are joint ventures of the same third party.
o (iv) One entity is a joint venture of a third entity and the other entity is an associate of
the third entity.
o (v) The entity is a post-employment defined benefit plan for the benefit of employees
of either the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also related to the
reporting entity.
o (vi) The entity is controlled or jointly controlled by a person identified in (a).
o (vii) A person identified in (a)(i) has significant influence over the entity or is a member
of the key management personnel of the entity (or of a parent of the entity).
The following are deemed not to be related: [IAS 24.11]
o two entities simply because they have a director or key manager in common
o two venturers who share joint control over a joint venture
o providers of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significantly influence the reporting
entity, simply by virtue of their normal dealings with an entity (even though they may affect
the freedom of action of an entity or participate in its decision-making process)
o a single customer, supplier, franchiser, distributor, or general agent with whom an entity
transacts a significant volume of business merely by virtue of the resulting economic
dependence
What are related party transactions?
A related party transaction is a transfer of resources, services, or obligations between related
parties, regardless of whether a price is charged. [IAS 24.9]
Disclosure
Relationships between parents and subsidiaries. Regardless of whether there have been
transactions between a parent and a subsidiary, an entity must disclose the name of its parent
and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate
controlling party produces financial statements available for public use, the name of the next
most senior parent that does so must also be disclosed. [IAS 24.16]
Management compensation. Disclose key management personnel compensation in total and
for each of the following categories: [IAS 24.17]
o short-term employee benefits
o post-employment benefits
o other long-term benefits
o termination benefits
o share-based payment benefits
Key management personnel are those persons having authority and responsibility for planning,
directing, and controlling the activities of the entity, directly or indirectly, including any
directors (whether executive or otherwise) of the entity. [IAS 24.9]
Related party transactions. If there have been transactions between related parties, disclose
the nature of the related party relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the potential effect of the relationship
on the financial statements. These disclosure would be made separately for each category of
related parties and would include: [IAS 24.18-19]
o the amount of the transactions
o the amount of outstanding balances, including terms and conditions and guarantees
o provisions for doubtful debts related to the amount of outstanding balances
o expense recognised during the period in respect of bad or doubtful debts due from related
parties
Examples of the kinds of transactions that are disclosed if they are with a related party
o purchases or sales of goods
o purchases or sales of property and other assets
o rendering or receiving of services
o leases
o transfers of research and development
o transfers under licence agreements
o transfers under finance arrangements (including loans and equity contributions in cash or
in kind)
o provision of guarantees or collateral
o commitments to do something if a particular event occurs or does not occur in the future,
including executory contracts (recognised and unrecognised)
o settlement of liabilities on behalf of the entity or by the entity on behalf of another party