IAS 37 Provisions, contingent liabilities and contingent assets

The Interpretations Committee received a request to clarify the measurement of a liability under IAS 37 that arises from an obligation to deliver allowances in an emission trading scheme. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. For the purpose of this Standard, such an obligation is treated as a legal obligation. Differences in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted.

An entity recognises a provision days inventory on hand ratio if it is probable that an outflow of cash or other economic resources will be required to settle the provision. Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities.

Unconsolidated amendments

When a sale is only part of a restructuring, a constructive obligation can arise for the other parts of the restructuring before a binding sale agreement exists. Evidence that an entity has started to implement a restructuring plan would be provided, for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan. A provision for restructuring costs is recognised only when the general recognition criteria for provisions set out in paragraph 14 are met.

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In some countries, the ultimate authority is vested in a board whose membership includes representatives of interests other than those of management (eg employees) or notification to such representatives may be necessary before the board decision is taken. Because a decision by such a board involves communication to these representatives, it may result in a constructive obligation to restructure. For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely. As noted in paragraph 29, an obligation for which an entity is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. In some cases, the entity will not be liable for the costs in question if the third party fails to pay. In such a case the entity has no liability for those costs and they are not included in the provision.

Understanding Contingent Assets

Accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. IFRS Standards do not specifically address the accounting for interest and penalties related to income taxes (interest and penalties).

1. This will be disclosed in the notes to the financial statements rather than being recorded as an asset in the statement of financial position.
2. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity.
3. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.
4. Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract as defined in paragraph 10.
5. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case.
6. If an entity applies those amendments for an earlier period, it shall disclose that fact.

Even though there is a similar likelihood that Rey Co would win the counterclaim, this is a probable inflow and therefore only a contingent asset can be recorded. This will be disclosed in the notes to the financial statements rather than being recorded as an asset in the statement of financial position. Whilst this seems inconsistent, this demonstrates the asymmetry of prudence in this standard, that losses will be recorded earlier than potential gains. Contingent assets are possible assets whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity.

Where a provision and a contingent liability arise from the same set of circumstances, an entity makes the disclosures required by paragraphs 84⁠–⁠86 in a way that shows the link between the provision and the contingent liability. As required by paragraph 51, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an entity recognises gains on expected disposals of assets at the time specified by the Standard dealing with the assets concerned. In 2012, the IASB added to its agenda a research project on the accounting for emissions trading schemes. The Interpretations Committee noted that one of the main issues in the IASB’s project on emission trading schemes was whether the accounting for the liabilities arising from emission trading schemes should be considered separately from the accounting for the assets.

Gains from the expected disposal of assets shall not be taken into account in measuring a provision. The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. the elderly or disabled irs tax credit for 2020 details. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case.

Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s statement of financial position are those that exist at the end of the reporting period. An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Contingent assets are ruled under the conservatism principle, which is an accounting practice that states that uncertain events and outcomes should be reported in a manner that results in the lowest potential profit. In other words, companies are discouraged from inflating expectations and are generally advised to utilize the lowest estimated asset valuation. Onerous Contracts—Cost of Fulfilling a Contract, issued in May 2020, added paragraphs 68A and 94A and amended paragraph 69.

However, they can be reported in the accompanying footnotes of financial statements, provided that certain conditions are met. The final criteria required is that there needs to be a probable outflow of economic resources. There is no specific guidance of what percentage likelihood is required for an outflow to be probable. A probable outflow simply means that it is more likely than not that the entity will have to pay money. If the lawyers had advised Rey Co that they would not be held liable for the employee’s injury, there would be no obligation as a result of a past event and therefore no provision would be recognised.

As per the contract between the Developer and Authority, land acquisition for the project was supposed to be carried out by the Authority and handed over to the Developer in a definite time frame. Let us understand the concept of recognition of contingent asset with the help of some suitable examples. Here, Rey Co would capitalise the $170m as part of property, plant and equipment. As only $150m has been paid, this amount would be credited to cash, with a $20m provision set up. In addition to this, the discount on the provision will be unwound and debited to finance costs.

Measurement of provisions

Sometimes, an entity is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). The other party may either reimburse amounts paid by the entity or pay the amounts directly. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.