Philippine Accounting: PAS 37 Provisions, Contingent Liabilities and Assets

Measurement of Provisions

• The amount recognised as a provision should be the best estimate of expenditure required to settle the present obligation at the reporting date.
• Provisions for one-off events are measured at the most likely amount.
• Provisions for large populations of events are measured at a probability-weighted expected value.
• Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
• If reimbursement is expected, it should be recognised as a separate asset, not as a reduction of the provision, only when it is virtually certain.

Contingent Liabilities and Assets

• Contingent liabilities are not recognised, but disclosed unless the possibility of an outflow of economic resources is remote.
• Contingent assets are not recognised, but disclosed where an inflow of economic benefits is probable.
• When the realisation of income is virtually certain, the related asset is not a contingent asset and its recognition is appropriate.

PAS 37 - Provision, Contingent Liabilities and Contingent Assets

• Objective: ensure appropriate recognition criteria and measurement bases are applied, and sufficient information is disclosed to enable users to understand the nature, timing, and amount of provisions, contingent liabilities, and contingent assets.
• Scope: applies to all entities in accounting for provisions, contingent liabilities, and contingent assets, except those resulting from executory contracts and those covered by another Standard.

Overview of Provisions, Contingent Liabilities and Contingent Assets

• Definition of a provision: a liability of uncertain timing or amount.
• Definition of a contingent liability: a possible obligation depending on an uncertain future event or a present obligation but payment is not probable or the amount cannot be measured reliably.
• Definition of a contingent asset: 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.

Recognition and Measurement

• Recognition of provisions: an entity must recognise a provision if, and only if, a present obligation (legal or constructive) has arisen, payment is probable, and the amount can be estimated reliably.
• An obligating event is an event that creates a legal or constructive obligation and results in an entity having no realistic alternative but to settle the obligation.
• A constructive obligation arises if past practice creates a valid expectation on the part of a third party.