Workshop on IFRS KKTulshan. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
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Transcript of Workshop on IFRS KKTulshan. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Workshop on IFRSKKTulshan
IAS 37Provisions, Contingent Liabilities and Contingent Assets
IAS 37 v AS 29IAS 37Constructive obligationDiscountingAS 29No guidance
ObjectiveEnsure that appropriateRecognition criteria andMeasurement basesAre applied toProvisionsContingent liabilities andContingent assetsAnd that sufficient information is disclosed in the notes to understand theirNatureTiming andAmount
ExclusionsExecutory contracts unless onerous contractsCovered by other standardsIAS 11:Constructions ContractsIAS 12:Income-taxesIAS 17:LeasesIAS 19:Employee BenefitsIAS 39:Financial instrumentsIFRS 4:Insurance ContractsHow about provisions for Depreciation, Impairment of assets, andProvisions for doubtful debts?
DefinitionsA provision is a liability of uncertain timing or amount.A liability is 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
Distinction Provisions v Other liabilitiesA provision is a liability of uncertain amount or timings
Trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier
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, including amounts due to employees
Accruals are often reported as part of trade and other payables
Provisions are reported separately
RecognitionA provision shall be recognized when all the following three conditions are met.Condition 1: An entity has a present obligation (legal or constructive) as a result of a past eventCondition 2: It is probable that an outflow of resources embodying economic benefits will be required to settle the obligationCondition 3: a reliable estimate can be made of the amount of the obligation
Recognition Condition 1An entity has, as a result of a past event,a present obligation (legal or constructive).
Recognition Condition 1Past EventThe past event is known as obligating eventAn obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligationWhen no realistic alternative exists:When settlement can be enforced by law; orWhen the event creates valid expectations.
Recognition Condition 1Present obligation could be of two types: legal or constructive A legal obligation is an obligation that derives fromA contract (through its explicit or implicit terms)Legislation; orOther operation of lawExamples:
A constructive obligation is an obligation that derives from an entities actions where:By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; andAs a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilitiesExamples:
Recognition Condition 1Probability of a present obligationIn almost all cases it will be clear that past event has given rise to present obligationIn rare cases it is not clear whether there is a present obligationApply probability criteriaMore likely than notConsider all available evidenceAdditional evidence events after reporting dateObligation should exists independently of entitys future action.
Recognition Condition 2Probable outflow of economic outflowsProbable means more likely than not
Recognition Condition 3Reliable estimateRationally payThird partyBest estimate ConsiderRisks and uncertaintiesPresent ValueFuture EventsIgnoreExpected disposal of assetsReimbursements
Measurement General RulesBest estimate Risks and uncertaintiesPresent ValueFuture EventsExpected disposal of assetsReimbursements
Measurement Best EstimateThe amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting periodThe best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time
Measurement Risks and uncertaintiesThe risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provisionA risk adjustment may increase the amount at which a liability is measuredCaution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understatedUncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities
Measurement Present ValueWhere the effect of time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation
Measurement Future EventsIt is only those obligations arising from past events existing independently of an entitys future actions (ie the future conduct of its business) that are recognized as provisionsFuture events that may effect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occurExamplesExpected cost reductions associated with increased experience in applying existing technologyHowever, an entity does not anticipate the development of a completely new technology unless it is supported by sufficient objective assessmentThe effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that legislation is virtually to be enacted
Measurement Expected disposal of assetsGains from expected disposal of assets shall not be taken into account in measuring a provision
Measurement - ReimbursementsThe reimbursements shall be recognized when, and only when, it is virtually certain that reimbursements will be received if the entity settles the obligationThe reimbursement shall be treated as a separate assetThe amount recognized for the reimbursements shall not exceed the amount of the provision
Changes in provisionProvisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimateIf it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, reverse the provisionIf there is no longer uncertainty about timing and amount, the provision becomes a liability
Use of provisionsA provision shall be used only for expenditures for which the provision was originally recognized.
Discussion 1 - WarrantiesA 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 sale. On past experience, it is probable (ie more likely than not) that there will be some claims under the warranties.
D1 Warranties Solution Present obligation as a result of a past obligating event:The obligating event is the sale of the product with a warranty which gives rise to a legal obligationAn outflow of resources embodying economic benefits in settlement:Probable for the warranties as a whole Conclusion: A provision is recognized for the best estimate of the costs of making good under the warranty products sold before the end of the reporting period
Discussion 2 Contaminated land legislation virtually certain to be enactedAn 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 31st March 2009 it is virtually certain that a draft law requiring clean-up of land already contaminated will be enacted shortly after the year-end.
D2 Contaminated land legislation virtually certain to be enacted - Solution Present obligation as a result of a past obligating event:The obligating event is the contamination of the land because of the virtual certainty of legislation requiring clean-upAn outflow of resources embodying economic benefits in settlement:ProbableConclusion:A provision is recognized for the best estimate of the costs of the clean-up.
Discussion 3 Contaminated land and constructive obligationAn entity in the oil industry causes contamination and operates in a country where there is no environment legislation. However, the entity has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. The entity has a record of honouring this published policy.
D3 Contaminated land and constructive obligation Present obligation as a result of a past obligating event:The obligating event is the contamination of the land, which gives rise to a constructive obligation because the conduct of the entity has created a valid expectation on the part of those effected by it that the entity will clean up contamination.An outflow of resources embodying economic benefits in settlement:ProbableConclusion:A provision is recog