IFRS KICKSTARTER SERIES MichaelFarrellOnline
IAS 37 – PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS.
KEY POINTS
➢ A provision is a liability of uncertain timing and amount. A provision is recognised when:
1) There is a present obligation from a past event;
2) There is a probable outflow of economic resources;
3) A reliable estimate can be made of the amount of the obligation.
Note: A provision is an unconditional obligation. If an entity can reasonably avoid it, it’s not a provision.
PROVISIONS TABLE
Typical Terminology Probability Contingent Liability Contingent Asset
Remote 0% - -
Possible / Less likely 1% - 49% Disclose a contingent liability -
Probable / Likely / Highly likely 50% - 99% Account for a provision Disclose a contingent asset
Virtually Certain 100% Account for a provision Account for a receivable
OTHER POINTS
➢ Where the provision being measured involves a large population of items use a weighted average probability calculation of expected values.
➢ Where a single obligation is being measured the individual most likely outcome is the best estimate.
➢ Where it is virtually certain that expenditure required to settle a provision will be reimbursed by another party treat the reimbursement as a separate asset.
➢ An onerous contract is where the unavoidable costs of meeting the contract are more than the expected benefits. A provision is required at the lower of: o Any exit costs for the contract; and o The net cost of fulfilling the contract.
➢ Restructuring provisions can only be made when: o The entity has a detailed formal plan in place; and o Has informed the parties that will be affected by the restructuring.
➢ Restructuring provision costs can only include those costs: o necessarily entailed by the restructuring; and o not associated with the ongoing activities of the entity.
Note: For restructuring costs, ask yourself the question “If the restructuring never went ahead, could the entity still incur the cost?” If so, it’s not a restructuring provision cost.