IFRS Standard: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable). Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material.

IAS 37 Objective and Scope

Objective

The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.

Scope

1 This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets, except:

  1. those resulting from executory contracts, except where the contract is onerous; and
  2. [deleted]
  3. those covered by another Standard.

2 This Standard does not apply to financial instruments (including guarantees) that are within the scope of IFRS 9 Financial Instruments.

3 Executory contracts are contracts under which neither party has performed any of its … Read more

IAS 37 Definitions

10 The following terms are used in this Standard with the meanings specified:

A provision is a liability of uncertain timing or amount.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

A legal obligation is an obligation that derives from:

  1. a contract (through its explicit or implicit terms);
  2. legislation; or
  3. other operation of law.

A constructive obligation is an obligation that derives from an entity’s actions where:

  1. by an established
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IAS 37 Provisions Other liabilities and Contingent liabilities

Provisions and other liabilities

11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:

  1. trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
  2. 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
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IAS 37 Recognition of provisions

Provisions

14 A provision shall be recognised when:

  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.

If these conditions are not met, no provision shall be recognised.

Present obligation

15 In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of Read more

IAS 37 Measurement of provisions

Best estimate

36 The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

37 The best estimate of the expenditure required to settle the present obligation is the amount that an 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. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the end of the reporting period. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure … Read more

IAS 37 Reimbursements

53 Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision.

54 In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

55 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 … Read more

IAS 37 Changes in and Use of Provisions

Changes in provisions

59 Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed.

60 Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as borrowing cost.

Use of provisions

61 A provision shall be used only for expenditures for which the provision was originally recognised.

62 Only expenditures that relate to the original provision are set against it. Setting expenditures against a provision that was originally recognised for … Read more

IAS 37 Application of the recognition and measurement rules

Future operating losses

63 Provisions shall not be recognised for future operating losses.

64 Future operating losses do not meet the definition of a liability in paragraph 10 and the general recognition criteria set out for provisions in paragraph 14.

65 An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An entity tests these assets for impairment under IAS 36 Impairment of Assets.

Onerous contracts

66 If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.

67 Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and … Read more

IAS 37 Disclosure Provisions and Contingencies

84 For each class of provision, an entity shall disclose:

  1. the carrying amount at the beginning and end of the period;
  2. additional provisions made in the period, including increases to existing provisions;
  3. amounts used (ie incurred and charged against the provision) during the period;
  4. unused amounts reversed during the period; and
  5. the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate.

Comparative information is not required.

85 An entity shall disclose the following for each class of provision:

  1. a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;
  2. an indication of the uncertainties
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IAS 37 Transitional provisions

93 The effect of adopting this Standard on its effective date (or earlier) shall be reported as an adjustment to the opening balance of retained earnings for the period in which the Standard is first adopted. Entities are encouraged, but not required, to adjust the opening balance of retained earnings for the earliest period presented and to restate comparative information. If comparative information is not restated, this fact shall be disclosed.

94 [Deleted]… Read more