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. .