FAR Provisions and Contingent Liabilities
In IAS 37 the following is discribed:
Provisions, contingent liabilities and contingent assets
IAS 37 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets except results from (3):
1. Financial statements
2. Executory contracts
3. Already specifically expalined in antoher IAS / IFRS standard (income taxes, leases, employee benefits, insurance contracts)
An executory contract is...
a contract under which neither party has performed any of its
obligations or both parties have partially performed their obligations to an equal extent
The definition of a provision:
A present obligation of the entity arising from past events, expected to result in an outflow of resources economic benefits
It is the ... that distinguishes provisions from contingencies liabilities
uncertainty
The current Conceptual Framework states that an essential characteristic of a liability is that the entity has a...
present obligation
An obligation is a...
duty or responsibility to act or perform in a certain way
A present obligation exists only where...
the entity has no realistic alternative but to settle the obligation
Definition of constructive obligation
An obligation that derives from an entity’s action where an established pattern of past practice indicates to other parties that the entity will accept certain responsibility
A provision may arise from either ... or ...
a legal obligation or constructive obligation
A contingent liability is (2):
1. A possible obligation that arise from past events and 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
2. A present obligation that arises from past events but is not recognised because:
It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or:
The amount of obligation cannot be measured with sufficient reliability
A possible obligation doesn't meet the requirement for the existence of a liability because
It is possible and not certain
A present obligation that arises from past events but is not recognized doesn't meet the recognition criteria because...
outflow of economic benefits and reliability of measurement is not certain
A contingent liability under IAS 37 means the following:
1. An obligation that is estimated to have less than a 50% likelihood of existing
2. A present obligation that has less than a 50% likelihood of requiring an outflow of economic benefits
3. A present obligation for which a sufficiently reliable estimate cannot be made
Contingent liabilities are not ... in the financial statements but must be ... in the financial statements, unless the possibility of an outflow is ...
recognised, disclosed, remote
A provision is recognised when (3)
1. An entity has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.
An obligating event is...
a past event that leads to a present obligation
the expected value method is...
weighting all possible outcomes by their associated probabilities
The provision is measured before ...
tax
Provisions are required to be discounted to ... where the effect of discounting is ...
present value, material
The discount rate used must be ... that reflects ...
a pretax rate, current market assessments
Only expected cash outflows must ... in measuring the provision. Any cash inflows are treated ...
be taken into account, separately from the measurement of the provision
When an amount of a provision is expected to be recovered from a third party...
IAS 37 requires that the recovery is recognised as an asset, but only when it is virtually certain
IAS 37 requires provisions to be reviewed at ... and adjusted to
reflect the ...
the end of each reporting period, current best estimate
Where discounting is used, the carrying amount of a provision ... in each period to reflect ...
increases, the passage of time
The increase of the carrying amount of a provision...
is recognised as borrowing cost
IAS 37 disallows recognition of provisions for ...
future operating losses
Onerous contract definition:
A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it (loss making contract)
If an entity is a party to an onerous contract, ...
a provision for the present obligation under the contract must be recognised
... has to be applied to assess whether or not individual contracts qualify as onerous contracts under the standard.
Judgement
Raising a provision in respect of an onerous contract, the amount to be recognised is the least of ... and ...
cost to fulfill the contract, penalties arising from failing the contract
IAS 37 also requires that before a separate provision is made for an onerous contract, an entity must first ...
recognise any impairment loss that has occurred on assets dedicated to that contract
To be able to raise a restructuring provision, three conditions need to be met:
1. Present obligation (legal or constructive) to restructure
2. Only costs that directly and necessarily caused by the restructuring may be included in this provision
3. Only when the entity is committed to the sale by a binding sale agreement this provision applies
a constructive obligation to restructure arises only when an entity (2)
1. Has a detailed formal plan
2. Has raised a valid expectation in those affected
Types of costs that are excluded from a restructioning provision:
1. retraining or relocating the continuing staff
2. marketing costs
3. costs related to investment in new systems and distribution networks
Changes in the decommissioning provision when (3)
1. A change in the estimated outflow of resources embodying economic benefits (income statement)
2. Change in the current market-based discount rate (income statement)
3. Increase that reflects the passage of time (profit or loss)
The disclosures required for contingent liabilities and assets would involve ... and ...
judgement, estimation
The requirements of ... are consistent with IAS 37 and IFRS 3
restructering provisions
The two areas of difference are in respect of contingent liabilities acquired in a ... and ...
business combination, contingent consideration.
IAS 37 does not allow ... to be recognised in the statement of financial position. Instead, they are ... if certain conditions are met
contingent liabilities, disclosed
However, IFRS 3 states that the requirements of IAS 37 ... in determining which contingent liabilities to recognise at the acquisition date.
do not apply
The only conditions for recognising the contingent liability in IFRS 3 are (2):
1. it must be a present obligation arising from past events
2. its fair value can be measured reliably
Definition of contingent consideration
An acquirer may enter into an agreement that entitles the vendor to additional consideration if certain conditions are met in the future