IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets.
Provisions
A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.
An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.
A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.
IAS 37 elaborates on the application of the recognition and measurement requirements for three specific cases:
- future operating losses—a provision cannot be recognised because there is no obligation at the end of the reporting period;
- an onerous contract gives rise to a provision; and
- a provision for restructuring costs is recognised only when the entity has a constructive obligation because the main features of the detailed restructuring plan have been announced to those affected by it.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed.
Contingent liabilities also include obligations that are not recognised because their amount cannot be measured reliably or because settlement is not probable. Contingent liabilities do not include provisions for which it is certain that the entity has a present obligation that is more likely than not to lead to an outflow of cash or other economic resources, even though the amount or timing is uncertain.
A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes.
Contingent assets
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. Contingent assets are not recognised, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognised in the statement of financial position, because that asset is no longer considered to be contingent.
In April 2001 the International Accounting Standards Board adopted IAS37 Provisions, Contingent Liabilities and Contingent Assets, which had originally been issued by the International Accounting Standards Committee in September 1998. That standard replaced parts of IAS10 Contingencies and Events Occurring after the Balance Sheet Date that was issued in 1978 and that dealt with contingencies.
In May 2020 the Board issued Onerous Contracts—Cost of Fulfilling a Contract. This amended IAS 37 to clarify that for the purpose of assessing whether a contract is onerous, the cost of fulfilling the contract includes both the incremental costs of fulfilling that contract and an allocation of other costs that relate directly to fulfilling contracts.
Other Standards have made minor consequential amendments to IAS37. They include IFRS9 Financial Instruments (Hedge Accounting and amendments to IFRS9, IFRS7 and IAS39) (issued November 2013), Annual Improvements to IFRSs 2010–2012 Cycle (issued December 2013), IFRS15 Revenue from Contracts with Customers (issued May 2014), IFRS9 Financial Instruments (issued July 2014), IFRS16 Leases (issued January 2016), IFRS17 Insurance Contracts (issued May2017), Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018) and Definition of Material (Amendments to IAS 1 and IAS 8) (issued October 2018).
As an expert in accounting standards, particularly in the realm of International Financial Reporting Standards (IFRS), I bring a wealth of knowledge and practical experience to elucidate the concepts embedded in the article concerning IAS 37. My expertise is grounded in a comprehensive understanding of accounting principles, regulatory frameworks, and the evolution of standards over time.
Firstly, let's delve into the core concepts outlined in the provided text:
IAS 37 Overview: International Accounting Standard 37 (IAS 37) delineates the guidelines for accounting and disclosure pertaining to provisions, contingent liabilities, and contingent assets. These elements play a crucial role in portraying a company's financial position with transparency and accuracy.
Provisions: A provision, as per IAS 37, is a liability of uncertain timing or amount. It may arise from legal or constructive obligations. Notably, a constructive obligation stems from an entity's actions that create an expectation of discharging certain responsibilities. Provisions encompass various scenarios such as warranty obligations, environmental cleanup responsibilities, and retailer policies for customer refunds.
The recognition of a provision hinges on the probability of an outflow of cash or economic resources to settle the obligation. Measurement involves assessing the amount an entity would rationally pay at the end of the reporting period. IAS 37 provides specific guidance on three cases: future operating losses, onerous contracts, and restructuring costs.
Contingent Liabilities: Contingent liabilities are potential obligations contingent upon uncertain future events beyond the entity's control. Examples include litigation where wrongdoing is uncertain and settlement is not probable. These are not recognized on the financial statement but are disclosed in the notes unless the likelihood of an outflow is remote.
Contingent Assets: Contingent assets, in contrast, are potential assets contingent on uncertain future events. They are not recognized unless it is more likely than not that an inflow of benefits will occur. When the inflow becomes virtually certain, the asset is recognized in the financial statement.
IAS 37 Amendments: Over time, IAS 37 has undergone amendments to enhance clarity and relevance. Notably, in May 2020, the International Accounting Standards Board issued amendments related to onerous contracts, explicitly clarifying the inclusion of both incremental and allocated costs in assessing contract onerousness.
Additionally, various other standards have made consequential amendments to IAS 37, including IFRS 9, IFRS 15, IFRS 16, IFRS 17, and others. These modifications aim to align accounting practices with evolving business landscapes and ensure financial reporting remains accurate and transparent.
In conclusion, my in-depth understanding of IAS 37 and related amendments positions me to interpret and explain the intricacies of these accounting principles, ensuring a nuanced comprehension of the standards at play in the financial reporting landscape.
