IAS 37 Provisions, Contingent Liabilities and Contingent Assets PDF

IAS 37 Provisions, Contingent Liabilities and Contingent Assets © ACCA 1 Key to chapter content ICONS © ACCA 2 IAS 37 Provisions, Contingent Liabilities and Contingent Assets © ACCA 3 Why An Accou...

IAS 37 Provisions, Contingent Liabilities and Contingent Assets © ACCA 1 Key to chapter content ICONS © ACCA 2 IAS 37 Provisions, Contingent Liabilities and Contingent Assets © ACCA 3 Why An Accounting Standard is Necessary To avoid the problem of manipulation of profits To recognise a provision: To reverse a provision: Dr Expense (P/L) Dr Provision (SOFP) Cr Provision (SOFP) Cr Expense P/L © ACCA 4 Why An Accounting Standard is Necessary $000 Year 1 Year 2 Year 3 (draft) (budget) (budget) Profit for the year 1,000 1,000 1,000 Make a provision (100) - - Reverse provision - - 100 Revised profit 900 1,000 1,100 © ACCA 5 Terminology Definitions Provision – a liability of uncertain timing or amount. Liability – a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. © ACCA 6 Recognition of Provisions: Criteria Does the entity have a present obligation 1 (legal or constructive) as a result of a past event? Is an outflow of economic resources probable? 2 Can a reliable estimate be made of the amount? 3 If ye s Recognise provision to AL L © ACCA 7 Present Obligation? Not simply an intention or need to undertake expenditure Does the entity have a present obligation 1 (legal or constructive) as a result of a past event? Derives from an Contract, legislation or entity’s own actions – other operation of law creates expectation © ACCA 8 Activity: Present Obligation Does the manufacturer have a present obligation arising from a past event? © ACCA 9 Answer to Activity: Present Obligation © ACCA 10 Activity: Present Obligation Does the entity have a present obligation arising from a past event? © ACCA 11 Answer to Activity: Present Obligation © ACCA 12 Probable? Is an outflow of economic resources probable? 2 What is probable? © ACCA 13  Activity: Probable Outflow Should the store make a provision for the costs of cleaning up the contamination? © ACCA 14 Answer to Activity: Probable Outflow © ACCA 15 Reliable Estimate? Can a reliable estimate be made of the 3 amount? Use IAS 37 measurement Very rare not to make reliable guidance estimate © ACCA 16 Measurement of Provisions Key point The amount provided should be the best estimate at the end of the reporting period of the expenditure required to settle the obligation Large population of items Single obligation Expected values Most likely outcome Disc o if eff unt mat ect eria l © ACCA 17 Activity: Expected Values What is the best estimate of a warranty provision? © ACCA 18 Answer to Activity: Expected values © ACCA 19 Activity: Single Obligation What is the best estimate of a provision for the outcome? © ACCA 20 Answer to Activity: Single Obligation © ACCA 21 Provisions: Accounting Entries Recognise “Unwind Use Reverse provision discount” provision provision Dr P/L Dr Finance Dr Provision Dr Provision (or asset) cost Cr Cash Cr P/L Cr Provision Cr Provision © ACCA 22 Reimbursements Reporting entity Reimbursement Recognises provision virtually certain Offset? Expense Income Provision (liability) Asset © ACCA 23 Specific Scenarios  Future operating losses  Onerous contracts  Restructuring  Repairs and maintenance  Decommissioning costs  Self-insurance © ACCA 24 Onerous Contract Definition Onerous contract – a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefit expected to be received under it. Pro vi  Examples? lowe de for cos st net t exit to fulfil con l/ trac t © ACCA 25 Restructuring Detailed plan that has been Present obligation as a result of implemented or announced a past event Probable outflow of economic benefits Reliably measured Direct costs not associated with continuing business © ACCA 26 Decommissioning Costs Now Oil rig acquired and Oil rig taken brought into use out of use Dismantling/ Cost recognised as restoration asset costs Discount to present value – a cost component of asset “Unwind the discount” over useful life of oil rig © ACCA 27 Example: Decommissioning Provision Depreciation @10% “unwinding of the discount” © ACCA 28 Contingent Liability Definition  A possible obligation from past Disclose unless outflow is events; or remote:  A present obligation from past  Brief description events that is not recognised  Estimated financial effect because:  Indication of uncertainties – An outflow of economic benefits is not probable; or  Possibility of reimbursement – The obligation cannot be measured reliably © ACCA 29 Real world example: Contingent liabilities © ACCA 30 Contingent Asset Definition Disclose if inflow of economic  A possible asset arising from benefits is probable: past events whose existence  Brief description will be confirmed by uncertain  Estimated financial effect future events not wholly within the control of the entity. © ACCA 31 Exam focus Section A Recognise Measure Accounting entries Section B Recognise, measure, account for (FS preparation) Section C Understand (analysis) Recognise (groups) © ACCA 32 Technical article: IAS 37 Click the links below to open each article on accaglobal Technical article IAS 37 – Provisions, c ontingent liabilities an d contingent assets © ACCA 33  Chapter 15: Summary  A provision is made when there is a present obligation as a result of a past event AND an outflow is probable AND the amount can be reliably measured  A present obligation may be legal or constructive  A provision is measured at the best estimate of the amount of expenditure required. This may be an expected value for large population of items  A reimbursement (e.g. insurance proceeds) is recognised only when it is virtually certain it will be received  Provisions cannot be made for future operating losses, repairs and maintenance or self-insurance  A contingent liability is disclosed unless the probability of an outflow is remote  A contingent asset is disclosed if there is a probable inflow. © ACCA 34  Chapter 15: Practice questions Study Question Bank Rovers 20 mins* * plus time for tutor guidance For FR Attempt the Study Question Bank questions listed above after studying this chapter Attempt Revision Question Bank questions in your revision phase, after studying all chapters © ACCA 35 Thank you © ACCA 36