IAS 37 Provisions, Contingent Liabilities and Contingent Assets summary - applies in 2024

Summary

The video discusses IAS 37, a financial reporting standard focusing on provisions, contingent liabilities, and contingent assets. It explains the criteria for recognizing provisions, highlighting the need for a present obligation, probable outflow of resources, and reliable estimates. The video distinguishes between legal and constructive obligations, provides guidelines on contingent liabilities and assets, and outlines how provisions are measured and disclosed. Additionally, it covers specific cases like restructuring, onerous contracts, and decommissioning, emphasizing the need for accurate financial reporting and careful judgment in accounting for uncertain obligations.

Takeaways

• 📚 Creative accounting practices like 'big bath provisioning' led to the creation of IFRS 37 to regulate reporting.
• 📈 IFRS 37 was issued in 1998 with the effective date of July 1999, aiming to set criteria for provisions, contingent liabilities, and assets.
• 💡 A provision is defined as a liability of uncertain timing or amount, arising from past events.
• 🔍 The recognition of a provision depends on three conditions: a present obligation, probable outflow of economic benefits, and a reliable estimate of the outflow.
• 🚫 Provisions cannot be recognized for future operating losses as they do not meet the liability definition.
• 💼 Contingent liabilities are possible obligations arising from past events, confirmed by uncertain future events.
• 💰 Contingent assets are possible assets arising from past events, confirmed by future events outside the entity's control.
• 📉 Provisions should be measured at the best estimate of the expenditure required to settle the obligation at the end of the reporting period.
• 🔄 Gains from expected disposals of assets should not be considered when measuring provisions.
• 💼 Provisions are recognized as expenses in the income statement and can be capitalized into the cost of another asset.
• 📋 Specific situations like onerous contracts, restructuring, and future operating losses are directly addressed by IAS 37.

Q & A

What is the main purpose of IAS 37?

The main purpose of IAS 37 is to set the criteria and rules for the measurement, recognition, and disclosure of provisions, contingent liabilities, and contingent assets.

What is a provision according to IAS 37?

A provision is a liability of uncertain timing and amount, arising from past events, the settlement of which is expected to result in an outflow of economic benefits.

What are the three conditions that must be met for a provision to be recognized?

A provision must be recognized if there is a present obligation (legal or constructive), the outflow of economic benefits required to settle the obligation is probable, and there is a reliable estimate of the outflow.

What is the difference between a provision and a contingent liability?

A provision is a present obligation that can be estimated reliably, while a contingent liability is either a possible obligation or a present obligation with an outflow of economic benefits that is only possible or cannot be measured reliably.

Why were the rules related to provisions created?

The rules were created to prevent companies from engaging in 'big bath' provisioning, where they would create and reverse provisions to smooth profits.

How should provisions be measured?

Provisions should be measured at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, considering risks, uncertainties, and sometimes the present value of the expenditure.

What is the expected value method for measuring provisions?

The expected value method is used when the measurement involves a large population of items, where the provision is measured as a weighted average of all possible outcomes by their probabilities.

Can gains from expected disposals of assets be included in the measurement of provisions?

No, gains from expected disposals of assets should not be taken into account when measuring provisions.

How are provisions accounted for in the income statement?

Provisions are generally recognized as an expense in the income statement, but sometimes they can be capitalized into the cost of another asset.

What is the 'unwinding of the discount' in the context of provisions?

Unwinding of the discount refers to the process of charging interest on a provision each reporting period to bring it to its future value by the time of its utilization when the provision represents its present value due to discounting.

What are some specific situations addressed by IAS 37 in relation to provisions?

IAS 37 addresses specific situations such as future operating losses, onerous contracts, restructuring, and provides guidance on how to account for them.