IAS 37Liabilities, Provisions & Contingencies Mark Fielding-Pritchard mefielding.com1

Definitions  Provision : A liability of uncertain timing or amount.   Liability : A present obligation as a result of past events the settlement of which is expected to result in an outflow of resources.   Contingent liability : A possible obligation depending on the occurrence/ nonoccurrence of uncertain future events, or a present obligation but no probable outflow of economic benefits or amount cannot be reliably measured.   Contingent assets: A possible asset that arises from past events and whose existence will be confirmed only by the occurrence/nonoccurrence of uncertain future events. Contingent assets are not recognized, but are disclosed if probable. When realization is virtually certain, the asset is no longer a contingent asset. mefielding.com2

Scope  Relates to provisions and contingent assets/liabilities  Out of scope:  Financial instruments valued at fair value (FV)  Executory contracts, unless they are onerous contracts  Insurance contracts  Provisions covered by other IFRS:  Construction Contracts, tax etc mefielding.com3

Provisions A PROVISION is a liability, which settlement amount is not known when incurred There is a present obligation (legal or implicit), derived from a past event. An estimate may be reliably measured An outflow of resources to settle the liability is probable mefielding.com4

Not Provisions  Accounts payable and other items where there is no doubt over the amount due  Accounting adjustments, depreciation, doubtful debts, impairment mefielding.com5

Do We Make a Provision? SituationProvision? Contingent liability disclosure? There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote. No No (IAS 37: 86) There is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. No Yes, disclosures are required for the contingent liability. (IAS 37: 86) A past event occurred which has resulted in a present obligation that probably requires an outflow of resources. Yes Yes, disclosures are required for the provision. (IAS 37: 84-85) mefielding.com6

Contingent Liabilities  Is an obligation: That may arises because of 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 (such as a legal case); or   A present obligation that arises from past events but is not recognized because: it is not probable that an outflow of resources embodying economic benefits willbe required to settle the obligation; or  the amount of the obligation cannot be measured mefielding.com7

Provision Decision Chart mefielding.com8 Present obligation as a result of an obligating event? No Possible obligation Yes No Yes Probable outflow? Remote ? Yes No Reliable estimate? Yes Provision Disclose contingent liability Do nothing Yes No

How Much Do we Provide? Maximum Loss How Much? All Expenses Include Sums due from insurance Take into account time value of money if material Exclude mefielding.com9

How Do We Know the Maximum Loss? ManagementExperiencePress Experts Subsequent Events mefielding.com10

Where Do We Get the Discount rate From?  Use standard techniques as for project appraisal  Reflects, risk, conditions in force at current time  Should be pre tax mefielding.com11

Contingent Assets  Criteria are as for liability  If probable disclose  If certain ‘make positive provision’ Dr Receivables Cr Revenue/Other Income as appropriate mefielding.com12

What If We Have a Liability We Will Receive Money For mefielding.com13 A pilot flies a light aircraft into our factory. We will have to repair the damage but the pilot offers to pay for the damage Recognise Recognise reimbursement if virtually certain Up to the amount of the liability, but no more No offset against provision in BS However expense in Income Statement is net

Adjustments to Provisions  Provisions should be reviewed at each balance sheet date and adjusted to reflect the best estimate at that time  If the outflow of resources has now become unlikely, the provision should be reversed out.  Provisions should be ‘transferred ‘ to other expenses mefielding.com14

Business Restructuring  One danger is that businesses can use provisions to smooth profits  Rank Hovis MacDougal had restructuring costs in their accounts in 8 out of 10 years (extraordinary items)  Examples may include sale or termination of a line of business the closure of business locations changes in organisational structure — redundancy mefielding.com15 A binding sale agreement or document showing action must be present.