HKAS 37 Provision, Contingent Liabilities and Contingent Assets

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Transcript of HKAS 37 Provision, Contingent Liabilities and Contingent Assets

  • HKAS 37Provision, Contingent Liabilities and Contingent Assets

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDEIFINITIONSProvision: a liability of uncertain timing or amount.Contingent liability: (a) 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 (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability.

    Contingent asset: 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.

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDEIFINITIONS (cont)Provisions Other liabilities (e.g. AP, accruals) ~ Provisions: a liability of uncertain timing or amount ~ Liabilities: present obligation to transfer out economic benefits as a result of past event. (less uncertainty) Provisions Contingent liabilities ~ Provisions -> liability: present obligations and probable outflow of economic benefits ~ Contingent liabilities -> Not liability: a reliable estimate of the amount cannot be made.

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsRECONGITION - Provision

    Three conditions:1) Present obligation as a result of past event- consider additional evidence provided by events after BS date Present obligation exists at BS date => a provision No present obligation exists at BS date => contingent liabilities 2) Outflow of resources will be required- Probable: P(event will occur) > P(event will not occur)3) Reliable estimate of the amount- use of estimates do not undermine their reliability- liability exits that cannot be recognised: disclosed as a contingent liability

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsRECONGITION - Contingent liabilities

    ~ Should not recognize~ Should be disclosed unless possibility of occurrence is remote where an enterprise is jointly liable for an obligation, obligation that is expected to be met by other parties is treated as contingent liability

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsRECONGITION - Contingent assets

    ~ Should not recognize~ Should be disclosed where inflow of economic benefit is probable. if outflow of economic benefits is required, recognize as provision

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsRECONGITION - Summary

    Present obligation as a result of an obligating event?NO

    Possible obligation?NOYES YESProbable outflow?NORemote?YESYES NOReliable estimate? NOYESProvideDisclose contingent liabilityDo nothing.

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsMEASUREMENT

    amount recognized being the BEST ESTIMATE of the expenditure required to settle the present obligation, determined by judgement, experience, reports from independent experts and additional evidence after the BS Risks and uncertaintiesTaken into account RISKS AND UNCERTAINTIESIf effect of time value of money is material, PRESENT VALUE of expected future expenditures should be usedFUTURE EVENTS (e.g. new legislation) should be reflected in the amount of a provisionGain on EXPECTED DISPOSAL OF ASSETS should NOT be taken into account in measuring a provision

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsScopeDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsREIMBURSEMENTS

    When expenditure required to settle a provision can be reimbursed by another party, then recognized as a separate assets, not exceed the amount of provisionIn income statement, reimbursements can net off the expenses incurred and disclosed the net amountIf enterprise will remain liable for the whole amount if the other party fails to pay, then recognized the whole amount as liabilities and reimbursed amount as separate assets if receipt is certainIf enterprise will not be liable if the other party fails to pay, no liability should be recognized

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsCHANGES IN PROVISIONS

    Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate

    If it is no longer probable of outflow of resources, provision should be reversed

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsAPPLICATION Future Operating Losses

    No provision should be recognizedReasons:- NOT liabilities- DO NOT MEET general recognition criteria of provision(i.e. present obligation, outflow of resources and reliable estimate)

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsAPPLICATION Onerous Contracts

    Definition: a loss making contract where the costs to perform and complete the contract exceeds the revenue brought in by the contractsExample: A company rented a factory plant at HKD10,000/mth for 2 years at non-cancellable term. But after 1 year, it decided to move the manufacturing operation to China. Then the factory plant would be vacant but still rents have to be paid. This rental agreement would become an onerous contract.Full provision would be made for the loss. (i.e. HKD 120k (HKD 10k x 12 mths) )

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsAPPLICATION Restructuring

    Examples:- sales / terminate a line of business- closure of business locations in a country- changes in management structure- reorganizations to change nature and focus of the enterprises operations

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsAPPLICATION Restructuring (cont)

    Recognize cost of restructuring as provision only when there is CONSTRUCTIVE OBLIGATIONConstructive obligation: there is a detail plan for restructuring including:- Timing: when the restructuring take place- Location: principal locations affected- Personnel: employees who will be compensated for termination of service- Event: business segment concerned- Money: amount of expenditure involved

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsAPPLICATION Restructuring (cont)

    Management intention to restructure before BS date does not give rise to constructive obligation unless:- started to implement- announced the main features of restructuring plan- raise valid expectation of those affectedNo obligation arises for the sale of an operation until there is a binding sale agreement

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDefinitionsRecognitionMeasurementReimbursementsChanges in provisionsApplicationDisclosure

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsDISCLOSURES

    The carrying amount at the beginning and end of the periodAdditional provisions made in the period, including increases to existing provisionsAmount s used (i.e. incurred and charged against the provision) during the periodUnused amounts reversed during the periodThe increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rateFor samples of disclosure please refer to Appendix D of HKAS 37

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsEXAMPLE 1

    A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sales. On past experience, it is probable that there will be some claims under the warranties.

    Present obligation as a result of a past obligating eventYesAn outflow of resources embodying economic benefits in settlementProbableConclusionA provision is recognized costs of making good under the warranty products sold before the BS date

  • HKAS 37 Provision, Contingent Liabilities and Contingent AssetsEXAMPLE 2

    An entity in the oil industry causes contamination but cleans up only when required to do so under the laws of the particular country in which it operates. One country in which it operates has had no legislation requiring cleaning up, and the entity has been contaminating land in that country for several years. At 31 December 2000 it is virtually certain that a draft law requiring a clean-up of land already contaminated will be enacted shortly after the year end.

    Present oblig