Contingencies are an interesting subject in accounting because for example within IAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognised because their 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.
So contingencies may exists as to the recognition or disclosure of assets and liabilities, but also for contingent consideration in IFRS 3 Business combinations, contingent settlement provisions included in financial instruments (arising on liquidation or in puttable instruments) and/or contingently issuable shares in IAS 33 Earnings per share, just to name a few.
Recognition criteria for provisions and contingent liabilities
Provisions can be distinguished from other liabilities (e.g. trade payables and accruals) due to the uncertainty concerning the timing or amount of the future expenditure required in settlement.
In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within IAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognised because their 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.
- an entity has a present obligation (legal or constructive) as a result of a past event
- it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
- a reliable estimate can be made of the amount of the obligation
Provisions are measured at the best estimate of the expenditure required to settle the present obligation at the reporting period:
- including any considerations for risks and uncertainties
- including time value of money (if material)
- including future events when there is sufficient objective evidence that they will occur
- excluding gains from the expected disposal of assets
Provisions are to be reviewed at the end of each reporting period and adjusted to reflect the current best estimate.