IAS 37 | Provisions, Contingent Liabilities and Contingent Assets

1

Scope

This Standard applies to accounting for provisions, contingent liabilities, and contingent assets, except those resulting from executory contracts (unless onerous) and those covered by another Standard.

2

Exclusions

It does not apply to financial instruments (including guarantees) within the scope of IFRS 9.

3

Executory Contracts

Executory contracts (where neither party has performed or both partially to equal extent) are excluded unless onerous.

5

Other Standards

Where another Standard deals with a specific type of provision/contingent item (e.g., income taxes IAS 12, leases IFRS 16, employee benefits IAS 19, insurance contracts IFRS 17), that Standard applies instead.

10

Definitions

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: (a) a contract (through its explicit or implicit terms); (b) legislation; or (c) other operation of law.
• A constructive obligation is an obligation that derives from an entity's actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
• A contingent liability is: (a) a possible obligation that arises 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; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability.
• A contingent asset is a possible asset that arises 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.
• An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
• A restructuring is a programme that is planned and controlled by management, and materially changes either: (a) the scope of a business undertaken by an entity; or (b) the manner in which that business is conducted.

11

Provisions vs Others

Provisions differ from trade payables and accruals due to uncertainty in timing or amount. Accruals are often part of trade payables, whereas provisions are reported separately.

13

Distinction

The Standard distinguishes provisions (recognised as liabilities) from contingent liabilities (not recognised because they are possible obligations or present obligations without probable outflow/reliable measurement).

14

Recognition Criteria

A provision is recognised when: (a) an entity has a present obligation (legal/constructive) from a past event; (b) it is probable an outflow of resources will be required; and (c) a reliable estimate can be made.

15

Present Obligation

If it is not clear whether a present obligation exists, a past event is deemed to give rise to one if, taking account of all evidence, it is more likely than not that an obligation exists at the reporting date.

17

Past Event

A past event creating an obligation is an obligating event only if the entity has no realistic alternative to settling it (enforceable by law or constructive obligation).

19

Future Actions

Provisions are recognised only for obligations existing independently of the entity's future actions (e.g., penalties for unlawful damage). No provision is recognised for costs to operate in the future (e.g., fitting smoke filters to comply with future laws).

23

Probable Outflow

An outflow is probable if the event is more likely than not to occur (probability > 50%). If not probable, a contingent liability is disclosed (unless remote).

24

Class of Obligations

For a large number of similar obligations (e.g., warranties), probability is determined by considering the class as a whole.

25

Reliable Estimate

Estimates are essential and do not undermine reliability. Entities can generally determine a range of outcomes to make a reliable estimate.

26

No Estimate

In the extremely rare case where no reliable estimate is possible, a liability exists that cannot be recognised and is disclosed as a contingent liability.

27

Contingent Liability

An entity shall not recognise a contingent liability.

28

Disclosure

A contingent liability is disclosed unless the possibility of outflow is remote.

31

Contingent Asset

An entity shall not recognise a contingent asset.

34

Contingent Asset Disclosure

A contingent asset is disclosed where an inflow of economic benefits is probable.

36

Best Estimate

The amount recognised is the best estimate of the expenditure required to settle the obligation at the end of the reporting period.

37

Rationale

It is the amount the entity would rationally pay to settle the obligation or transfer it to a third party at the reporting date.

39

Expected Value

For a large population of items, the obligation is estimated by weighting all possible outcomes by their probabilities (expected value).

40

Single Obligation

For a single obligation, the individual most likely outcome may be the best estimate, but other outcomes are considered (adjusting if mostly higher/lower).

42

Risk/Uncertainty

Risks and uncertainties are taken into account. Risk adjustments may increase the liability, but excessive provisions or deliberate overstatement are not justified.

45

Present Value

Where the time value of money is material, the provision is the present value of expected expenditures.

47

Discount Rate

The discount rate is a pre-tax rate reflecting current market assessments of time value of money and risks specific to the liability (if not adjusted in cash flows).

48

Future Events

Future events affecting the amount (e.g., technological changes) are reflected if there is sufficient objective evidence they will occur.

51

Asset Disposal

Gains from expected disposal of assets are not taken into account in measuring a provision.

53

Reimbursements

Reimbursements (e.g., insurance) are recognised only when virtually certain. They are treated as separate assets and cannot exceed the provision amount.

54

Net Presentation

In the income statement, the expense may be presented net of the reimbursement.

59

Review

Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. If outflow is no longer probable, the provision is reversed.

61

Use of Provisions

A provision is used only for expenditures for which it was originally recognised (no offsetting against other costs).

63

Operating Losses

Provisions shall not be recognised for future operating losses.

66

Onerous Contracts

If a contract is onerous, the present obligation is recognised and measured as a provision.

68

Onerous Cost

Unavoidable costs are the lower of the cost of fulfilling the contract and any compensation/penalties for failure. Cost of fulfilling includes incremental costs (labour/materials) and an allocation of other direct costs (depreciation).

72

Restructuring

A constructive obligation for restructuring arises only when an entity: (a) has a detailed formal plan (identifying business, locations, employees, expenditures, timing); and (b) has raised a valid expectation in those affected by starting implementation or announcing main features.

80

Restructuring Costs

A restructuring provision includes only direct expenditures necessarily entailed by the restructuring and not associated with ongoing activities (excludes retraining, marketing, new systems).

84

Disclosure

For each class of provision, disclose: carrying amount start/end, additional provisions, amounts used, unused amounts reversed, and increase due to discounting.

85

Narrative Disclosure

Disclose description of obligation nature/timing, indication of uncertainties, and amount of expected reimbursement.

86

Contingent Liability Disclosure

Unless remote, disclose description of nature, estimate of financial effect, uncertainties, and reimbursement possibility.

89

Contingent Asset Disclosure

Where inflow is probable, disclose description of nature and estimate of financial effect.

92

Prejudice Exemption

In extremely rare cases where disclosure prejudices a dispute, information need not be disclosed, but the general nature of the dispute and reason for non-disclosure must be stated.

95

Effective Date

The Standard applies for annual periods beginning on or after 1 July 1999.