Ias 37 provisions, contigent liabilities and assets lecture note

Ias 37 provisions, contigent liabilities and assets lecture note Ias 37 provisions, contigent liabilities and assets lecture note Ias 37 provisions, contigent liabilities and assets lecture note Ias 37 provisions, contigent liabilities and assets lecture note

IAS 37: Provisions, Contingent Liabilities & Contingent

Assets

ACCA F7/FR Lectures

Updated: July 2025

Introduction to IAS 37

Context

IAS 37 Provisions, Contingent Liabilities & Contingent Assets governsaccounting for provisions, contingent liabilities, and contingent assets,ensuringprudence,transparency, and reliabilityin financial reporting

Equivalent to VAS 18in Vietnam

Focus: Recognition, measurement, and disclosure of uncertain

obligations and potential assets

Objective: Provide stakeholders with clear insights into financial risksand opportunities

Key for ACCA F7/FR, with VAS 18 differences emphasized

Overview of Key Concepts

Core Elements

Provisions: Liabilities with uncertain timing or amount.

Contingent Liabilities: Possible obligations or non-provisionable

Definition of Provisions

IAS 37 Paragraph 10

A provisionis a liability of uncertain timing or amount, arising from apresent obligation due topast events, expected to result in anoutflow ofeconomic resources

Obligations:Legal (e.g., contracts) orconstructive(e.g., public

warranty policies)

Example: Provision for product recalls due to defects

Exam Tip: Link to past events and obligation type in answers

Provisions vs Trade Payables

IAS 37 Paragraph 11

Provisions: Uncertain timing or amount (e.g., warranty costs).

Trade Payables: Certain timing and amount, formalized by invoices

or agreements

Example: Warranty provision (uncertain) vs supplier invoice (certain).Practical Scenario: Trade payables arise from routine purchases;

provisions from risk estimates

Exam Tip: Emphasize certainty level in classifications

Provisions vs Accruals

Key Differences

Provisions: Uncertain, future-oriented costs (prudence principle) Accruals: More certain costs for received goods/services, not yet

invoiced (matching principle)

Example: Environmental cleanup provision vs accrued utility bill.Practical Scenario: Accruals for unbilled services; provisions for legalsettlements

Exam Tip: Link accruals to matching, provisions to prudence

Provisions vs Asset Adjustments

IFRS Clarification

Provisions areliabilities, not adjustments to asset values (e.g.,

depreciation, impairments, doubtful debts)

Example: Doubtful debts offset receivables, not presented as liabilities.VAS 18: Calls doubtful debts provisions but offsets receivables,

causing inconsistency

Exam Tip: Clarify IAS 37 scope excludes asset adjustments; referenceIAS 36 for impairments

Core Components of IAS 37

Six Key Areas

1 Definition: Provisions as uncertain liabilities

2 Recognition Criteria: Conditions for recording provisions

3 Measurement: Estimating provision amounts

4 Special Cases: Future losses, onerous contracts, restructuring

5 Contingent Liabilities/Assets: Handling potential items

6 Disclosures: Reporting requirements for transparency

Objective: Balance prudence with reliable reporting

Recognition Criteria for Provisions

IAS 37 Paragraphs 1435

A provision is recognized if:

1 Apresent obligation (legal or constructive) exists from a past event

2 It is probable(>50% likelihood) that an outflow of resources willoccur

3 The amount can bereliably estimated

Example: Provision for legal settlements if probable and estimable.Exam Tip: Verify all three criteria in scenarios

Present Obligation and Past Event

Reliable Estimation

Requirement

The obligations amount must bereliably estimated, even if uncertain,using available evidence

Example: Warranty costs estimated from past defect rates

Practical Scenario: Expert opinions for legal provisions

Exam Tip: Justify estimation basis (e.g., historical data, expert input)

Measurement of Provisions

IAS 37 Paragraphs 3652

Provisions are measured at the best estimate of expenditure to settle theobligation at the reporting date

Single obligation: Most likely outcome, adjusted for risk

Multiple obligations: Expected value (weighted average)

Discount future cash flows to present value if material

Exam Tip: Specify method (e.g., expected value, discounting)

Example: Warranty Provision

Example: Discounted Provision

Review and Reversal of Provisions

IAS 37 Requirement

Provisions arereviewed annually and adjusted to reflect the best estimate

If no outflow is probable, provisions are reversed

Example: Warranty provision reduced if defect rates drop

Journal (reversal): DR Provision $X, CR Income $X (PL)

Practical Scenario: Reassess legal provisions with new evidence

Exam Tip: Discuss review process and reversal entries

Example: Legal Claim Provision

Scenario (T Co)

T Co faces a $2M lawsuit for breach of contract (past event) Legal advice:20% chance of losing Legal defense costs: $0.1M, certain next year

Claim ($2M): 20% < 50%, not probable; no provision

Legal costs ($0.1M): Certain, meets criteria; provision required

Total provision:$100,000

Journal: DR Legal Expense $100,000, CR Provision $100,000

Future Operating Losses

Onerous Contracts

IAS 37 Paragraphs 6669

An onerous contract has unavoidable costs exceeding benefits Provisionfor the lower of fulfillment or penalty costs

Example: Loss-making supply contract due to pricing errors

Journal: DR Loss on Contract (PL), CR Provision

Practical Scenario: Leases with unavoidable losses (pre-IFRS 16).Exam Tip: Calculate unavoidable costs and justify provision

Journal: DR Loss on Contract $0.8M, CR Provision $0.8M.

Practical Scenario: Compare costs to determine provision amount

IAS 37 Paragraphs 7083

Restructuring involves significant changes (e.g., closing facilities,

relocating operations) Provisions require a detailed plan andpublic

announcement/implementation

Excludes: Training, marketing, or future operating costs

Example: Factory closure costs after board approval and announcement

Exam Tip: Verify plan and exclude future-oriented costs

Example: Restructuring

Scenario (T Co)

T Co plans factory restructuring in 11.X1, hiring consultants for feasibility.Training planned for 1.X2 No announcement or detailed plan by 31.12.X1

Restructuring: No obligation; no provision

Training: Future cost; not restructuring-related; no provision

Total provision: $0

Practical Scenario: Announcement triggers obligation

Exam Tip: Explain lack of obligation and exclude training

Contingent Liabilities

IAS 37 Paragraphs 2730

A contingent liability is:

Apossible obligation (50%) from past events, or

A present obligation not meeting provision criteria (e.g., not probable

or not estimable)

Not recognized; disclosed unless remote(<10%)

Example: Lawsuit with 30% chance of loss

Contingent Assets

IAS 37 Paragraphs 3135

A contingent assetis a possible asset from past events, confirmed byuncertain future events

Not recognized; disclosed only if inflow is probable(>50%)

Example: Potential insurance recovery from a claim

Practical Scenario: Avoid recognition due to prudence

Exam Tip: Justify non-recognition with prudence principle

Provisions vs Contingent Liabilities

Key Differences

Provisions: Probable (>50%) outflow, recognized.

Contingent Liabilities: Possible (50%) outflow, disclosed unless

remote

Example: 60% claim probability (provision) vs 20% (contingent liability)

Practical Scenario: Legal claims shift based on evidence

Exam Tip: Use probability thresholds (>50% vs 50%) to differentiate

Example: Contingent Liabilities

Scenario (T Co)

At 30.9.X4: (1) $1M onerous contract, (2) unannounced restructuring, (3)deferred tax liability, (4) expired warranty

(1) Onerous contract: Provision $1M (probable)

(2) Restructuring: No obligation; disclose if possible

(3) Deferred tax: IAS 12 liability, not IAS 37

(4) Warranty: No obligation; no disclosure

Provisions: (1) only

Disclosure Requirements

IAS 37

Provisions: Nature, amount, uncertainties, assumptions, timing Contingent Liabilities: Nature, estimated effect, uncertainties.

Contingent Assets: Nature, estimated effect (if probable).

Example: Disclose warranty provisions and pending lawsuits

Practical Scenario: Detailed disclosures mitigate investor risk concerns

Exam Tip: List specific disclosures for each category

Practical Applications

Real-World Scenarios

Warranties: Provisions for product returns (e.g., electronics).

Legal Claims: Provisions or disclosures for litigation risks.

Onerous Contracts: Provisions for loss-making agreements (e.g.,

leases)

Restructuring: Provisions for closure costs post-announcement.

Practical Scenario: Retail firms provision for returns; manufacturers forrecalls

Exam Tip: Link scenarios to recognition and measurement criteria

Exam Tips and Summary

restructuring

Disclose: Nature, amounts, uncertainties for provisions/contingents

Summary