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IAS 37 – PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT .

KEY POINTS

➢ A 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

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.