Provisions and contigent liabilities

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.

An entity shall not recognise a contingent liability.

This is what it is about, … Continue reading

A court case

IAS 37 Provisions, Contingent Liabilities and Contingent Assets –
Example on recognising and measuring provisions

The case:

A customer has sued Entity X, seeking damages for injury the customer allegedly sustained from using a product sold by Entity X. Entity X disputes liability on grounds that the customer did not follow directions in using the product. Up to the date the board authorised the financial statements for the year to 31 December 20X1 for issue, the entity’s lawyers advise … Continue reading

Closure of a division—no implementation before end of reporting period

IAS 37 Provisions, Contingent Liabilities and Contingent Assets –
Example on recognising and measuring provisions

The case:

On 12 December 20X0 the board of an entity decided to close down a division. Before the end of the reporting period (31 December 20X0) the decision was not communicated to any of those affected and no other steps were taken to implement the decision.

Present obligation as a result of a past obligating event—there has been no obligating event, and … Continue reading

Present obligation as a result of past event

Obligation: A duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise, however, from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner.

Transfer of an economic resource

The transfer of an economic resource embodies economic benefits that will be required to settle the obligation, resulting in an outflow (in general of cash) from the reporting entity to a third party.

A definition of resource:

Obligation

Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. This is normally the case, for example, with amounts payable for goods and services received. However, obligations do not have to be legally binding.