IAS 37 Provisions, Contingent Liabilities and Contingent ... IAS 37 Provisions, Contingent...

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Transcript of IAS 37 Provisions, Contingent Liabilities and Contingent ... IAS 37 Provisions, Contingent...

  • IAS 37 Provisions, Contingent

    Liabilities and Contingent Assets

  • Scope

    Applies to accounting for provisions, contingent liabilities and contingent assets except those:

    Resulting from executory contracts, unless they are onerous; or

    Covered by another standard

  • Say you sign a contract with W.Consulting to do quarterly IFRS updates from 2014 to 2019 at a cost for $1 million per annum on 31December 2014, what provision would you raise at 31

    December 2015, 2016, and every year thereafter?

    So whats an executory contract?

  • Key Definitions

    Liabilities A present obligation of the entity Arising from past events The settlement of which is expected to result in an

    outflow from the entity of resources embodying economic benefits

    Provisions

    Liabilities of uncertain timing or amount

  • Key Definitions (contd)

    Accruals

    Are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier

    Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.

    So, is Leave Pay a Provision or an Accrual?

  • Key Definitions (contd)

    Contingent liabilities

    Possible obligations arising from a past event to be confirmed by future events not wholly within the control of the entity, or

    Present obligations arising from a past event of which the outflow of economic benefits is not probable, or that cannot be measured reliably

  • Provisions- Recognition

    All 3 criteria must be met

    Must be a present obligation as a result of a past event

    Outflow of economic benefits must be probable

    Reliable estimate of outflow can be made

  • Recognition criteria -Legal or constructive

    Legal

    Contract

    Law / legislation

    Constructive

    Established pattern of past practice

    Published policies

    Create valid expectation

  • Recognition- Past Event

    No realistic alternative but to settle the obligation

    Not dependent on future actions of the entity

    Actions to reduce extent of obligation limit measurement not recognition

    Always involves a third party

    Even if that third party cannot be specifically identified

    Cannot arise from a purely internal decision

  • Recognition- Probable Outflow

    Probable means more likely than not or in geek speak: > 50% chance of occurring!

    For obligations like warranty provisions, this probability criteria is considered for the class of obligations as a whole

  • Recognition- Reliable Estimate

    Dont be shy, estimate!

    Estimates are a necessary part of the preparation of AFS and do not undermine their reliability

    In most cases an entity will be able to determine a range of possible outcomes

    In extremely rare circumstances where it is not possible to determine a reliable estimate no provision is recognised (but exists) and a contingent liability is disclosed

  • When do you recognise a contingent liability?

    Next Year...maybe!

  • Recognition criteria cheat sheetasset, liability or contingency?

    Liabilities Outflow of economic benefits

    Probable Possible Remote

    Reliable estimate Liability

    RecognisedContingent liabilityDisclose

    Contingent liability

    Do nothing

    No reliable estimate

    Contingent liability

    Disclose

    Contingent liability

    Disclose

    Contingent liability

    Do nothing

  • Recognition criteria cheat sheetasset, liability or contingency?

    Assets Inflow of economic benefits

    Virtually certain

    Probable Possible Remote

    Asset as per definition

    Contingent asset

    Disclose

    Contingent asset

    Do nothing

    Contingent asset

    Do nothing

  • Recognition criteria judgement

    Possible guidelines:

    Virtually certain: > 90 %

    Probable (more likely than not): > 50 %*

    Possible: < 50 %

    Remote: < 10 %

    * In the standard

  • Provisions- Measurement

    Provisions are measured using the bestestimate of the expenditure required tosettle the obligation

    Best estimate is for a single event is themost likely outcome

    Best estimate for a large population of items(like a warranty provision) is determined byweighting the possible outcomes (financialimpact) by their associated probabilities-expected value

  • Provisions- Measurement

    Provisions are to be measured at presentvalue; where the impact of discounting ismaterial provisions should be discounted atthe appropriate pre-tax discount rate

    Discount rates should reflect the time valueof money and the risk associated with theliability being measured

  • IAS 37 Reimbursements

    Recognise reimbursement only when virtually certain

    Reimbursement asset not offset against provision recognised for obligation

    Offset permitted in profit or loss

  • Prudence?

    Do not provide for...

    Future operating losses (rainy days)

    Maintenance / refurbishment of own assets

    General restructuring projects

    General business risks

  • Onerous contracts

    Contract in which unavoidable costs of meeting the obligation exceed the economic benefits expected to be received

    Measurement at the lower of:

    The fulfilment cost; or

    Any compensation or penalties arising from failure to fulfil it

    Consider additional impairment of assets dedicated to the onerous contract

  • Disclosure

    By category

    Brief description, timing, uncertainties of provisions

    Detailed roll-forward of provisions

    Expected and recognised reimbursements relating to provisions

    Brief description and financial effect of anycontingent assets and liabilities

  • Disclosure an exception

    Disclosure not required in the rare circumstances when disclosure would seriously prejudice the position of the entity in a dispute with another party

    Disclose the general nature of the dispute and the fact that, and reason why, the information has not been disclosed

  • IFRIC 21 Levies

  • Background

    Issued in May 2013.

    Governments often impose levies on entities for various purposes.

    IFRIC received request for guidance on how to account for levies paid by entities.

  • Time to think

  • Time to think

    Whats the difference between a levy and a tax?

    LEVY? TAX?

  • IAS 12

    Income taxes include all domestic and foreign taxes which are based on taxable profits.

  • IFRIC 21

    A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation (ie laws/regulations), other than:

    those outflows of resources that are within the scope of other Standards (such as income taxes that are within the scope of IAS 12 Income Taxes); and

    fines or other penalties that are imposed for breaches of the legislation.

  • Scope

    IFRIC 21 addresses:

    the accounting for a liability to pay a levy if that liability is within the scope of IAS 37; and

    the accounting for a liability to pay a levy whose timing and amount is certain.

  • Scope

    IFRIC 21 does not apply to:

    costs that arise from recognising a liability to pay a levy;

    outflows of resources within the scope of other Standards;

    payments for the acquisition of an asset, or for the rendering of services under a contractual agreement with a government;

    liabilities that arise from emissions trading schemes

  • IFRIC 21 Issues

    What is the obligating event that gives rise to the

    recognition of a liability to pay a levy?

    Does economic compulsion to continue to operate in a

    future period create a constructive obligation to pay a levy that will be triggered by operating in that future

    period?

    Does the going concern assumption imply that an

    entity has a present obligation to pay a levy that

    will be triggered by operating in a future period?

    Does the recognition of a liability to pay a levy arise at a point in time or does it, in some circumstances, arise progressively over time?

    What is the obligating event that gives rise to the

    recognition of a liability to pay a levy that is triggered if

    a minimum threshold is reached?

    Are the principles for recognising in the annual

    financial statements and in the interim financial report a

    liability to pay a levy the same?

  • Issue 1: What is the obligating event?

    Consensus:

    Obligating event is the activity that triggers the payment of the levy, as identified by the legislation.

  • Time to think

    An entity operates in an industry that requires a levy to be paid when revenue is generated in 2014. The calculation of that levy is based on the revenue that was generated in 2013.

    What is the obligating event:

    a) The generation of revenue in 2014?

    or

    b) The generation of revenue in 2013?

  • Solution

    The obligating event for the levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

  • Issue 2: Does economic compulsion to operate create a constructive obligation?

    Consensus:

    An entity does not have a constructive obligation to pay a levy that will be triggered by o