IAS 37 — Provisions, Contingent Liabilities and Contingent Assets__Keep It Simple

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IAS-37 Provisions, Contingent liabilities, Contingent assets
Difference
Liability
• A known amount
• Present obligation of entity arising from past event
• Results in outflow of resources
• Examples include; Trade payables, accrued salaries, wages
• Recognized as and when the liability arises
Provision
• A liability of uncertain timing or amount
• Recognized when it meets the recognition criteria
Recognition criteria for Provision
Present Obligation
• The present obligation must have been arise from a past event
• Determine present obligation at the end of reporting period using:
- opinion of experts
- evidence provided by IAS-10
Probable outflow of resources
• There should be outflow of resources
• The outflow of resources and other events is probable if the event is more likely than not to occur.
• A more than 50% chances maybe regarded as probable
Reliable Estimate
• The outflow should have a reliable estimate
• This would be a extreme rare case where no reliable estimate can be made.
Measurement of a Provision
At what amount?
Best Estimate:
The amount recognize shall be the best estimate of expenditure require to settle or transfer it to a third party the estimate and financial effect are determine by:
• judgment of management
• similar transactions occurred
• independent experts
• Ias-10
Risks and Uncertainties:
• Risk adjustments may INCREASE the amount at which a liability is measured
• Risk and uncertainties surrounding the amount of expenditure are DISCLOSED
Present Value:
• The amount of provision shall be the present valve of the expenditure, where the effect of time valve of money is material
Future Events:
• Future events may affect the amount require to settle the obligation (say a change in technology), an entity might include expected cost increase/decrease associated.
Gains from Expected Disposal:
• gains shall not be taken into account in measuring a provision, even if it is closely associated to a provision.
Use of Provision
• A provision shall be used only for expenditure for which it was originally recognized
• If the provision is more than the amount needed to settle the liability, the balance is released as a credit back through Income statement.
• If the provision is insufficient an extra expense is recognized
Contingent liabilities
Contingent liability is one that exist at the reporting date but cannot be recognized because it fails to meet recognition criteria (anyone or all)
Possible obligation
• A possible obligation that arises from Past events.
• It has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources
Present obligation
A present obligation that fails to meets the other two recognition criteria for provision recognition i.e:
• It is not probable that an out flow of resources will occur
• Reliable estimate of amount cannot be made
A contingent liability is DISCLOSED
A Joint liability is disclosed as a contingent liability to the extent met by the other party ; and
a provision for the part of obligation for which outflow is probable
Contingent assets
A contingent asset is a possible asset that arises from past event. As its existence is yet to be confirmed
• Contingent assets usually arise from unplanned or other unexpected event that give rise to the possibility of an inflow of economic benefits
• An entity shall not recognize a contingent asset, since this may result in recognition of income that mat never be realized
• However, when the realization is virtually certain then its recognition is appropriate
• If an inflow is probable (50%) an entity DISCLOSES contingent asset.

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[mariasehreen]

A company has purchased a plant for Rs. 5 million with an estimated useful life of 10 years. In order to provide funds for replacement of plant the company has decided to create provision with equal amounts for ten years. Therefore; the company debited “Plant replacement charges” and credited “Provision for Plant replacement” in current year’s financial statements.

Comment and explain, whether the above provision meets the requirements of IAS 37?

 can you please answer me ?