IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Objective

The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.

Provisions

Definition

A provision is a liability of uncertain timing or amount.

Recognition

A provision should be recognised when:

• an entity has a present obligation (legal or constructive) as a result of a past event;
• it is probable that an outflow of economic benefits will be required to settle the obligation; and
• a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognised.

Measurement

The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. Where a single obligation is being measured,
the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the entity considers other possible outcomes.

Contingent liabilities

Definition

A contingent liability is:

• a possible obligation 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; or
• a present obligation that arises from past events but is not recognised because it is not probable that an outflow of economic benefits will be required to settle the obligation; or
• a present obligation that arises from past events but is not recognised because the amount of the obligation cannot be measured with sufficient reliability.

Disclosure

Entities do not recognise contingent liabilities (i.e. they do not record an expense and a liability). An entity should disclose a contingent liability in a note, unless the possibility of an outflow of economic benefits is remote.

Contingent assets

A contingent asset is 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.

An entity shall not recognise a contingent asset. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition as revenue is appropriate.

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