International Accounting

Standard - 37
Provisions, Contingent
Liabilities and
contingent Assets
 1. Background
• In April 2001 the International Accounting
Standards Board (IASB) adopted IAS 37
Provisions, Contingent Liabilities and Contingent
Assets, which had originally been issued by the
International Accounting Standards Committee in
September 1998. That standard replaced parts of
IAS 10 Contingencies and Events Occurring after
the Balance Sheet Date that was issued in 1978
and that dealt with contingencies.
 2. Introduction
• IAS 37 prescribes the accounting and disclosure for
all provisions, contingent liabilities and contingent
assets, except:
(a) those resulting from financial instruments that
are carried at fair value;
(b) those resulting from executory contracts,
except where the contract is onerous. Executory
contracts are contracts under which neither party has
performed any of its obligations or both parties have
partially performed their obligations to an equal
extent;
(c) those arising in insurance entities from
contracts with policyholders; or
(d) those covered by another Standard.
 3. Objective
The objective of this Standard 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.
 4. Scope
• This Standard shall be applied by all entities in accounting for provisions, contingent
liabilities and contingent assets, except:
(a) those resulting from executory contracts, except where the contract is onerous
(burdensome); and
(b) those covered by another Standard.
• This Standard does not apply to financial instruments (including guarantees) that are
within the scope of IFRS 9 Financial Instruments.
• When another Standard deals with a specific type of provision, contingent liability or
contingent asset, an entity applies that Standard instead of this Standard. For example,
some types of provisions are addressed in Standards on:
(a) construction contracts (see IAS 11 Construction Contracts);
(b) income taxes (see IAS 12 Income Taxes);
(c) leases (see IAS 17 Leases). However, as IAS 17 contains no specific
requirements to deal with operating leases that have become onerous, this Standard
applies to such cases;
(d) employee benefits (see IAS 19 Employee Benefits); and
(e) insurance contracts (see IFRS 4 Insurance Contracts). However, this Standard
applies to provisions, contingent liabilities and contingent assets of an insurer, other
than those arising from its contractual obligations and rights under insurance contracts
within the scope of IFRS 4.
 5. Definitions
The following terms are used in this Standard with the
meanings specified:
• A 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.
• An obligating event is an event that creates a legal or
constructive obligation that results in an entity having no
realistic alternative to settling that obligation.
• A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.
• A constructive obligation is an obligation that derives from an entity’s
actions where:
(a) 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; and
(b) as a result, the entity has created a valid expectation on the part of
those other parties that it will discharge those responsibilities.
• A contingent liability is:
(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 recognized
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.
• 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 onerous contract is a contract in which the
unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to
be received under it.
• A restructuring is a programme that is planned and
controlled by management, and materially changes
either:
(a) the scope of a business undertaken by an
entity; or
(b) the manner in which that business is
conducted.
 6. Provisions and other liabilities
Provisions can be distinguished from other liabilities such
as trade payables and accruals because there is uncertainty
about the timing or amount of the future expenditure
required in settlement. By contrast:
(a) 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; and
(b) 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 (for example, amounts relating
to accrued vacation pay). Although it is sometimes
necessary to estimate the amount or timing of accruals, the
uncertainty is generally much less than for provisions.

Accruals are often reported as part of trade and other

payables, whereas provisions are reported separately.
7. Relationship between provisions and contingent liabilities
• In a general sense, all provisions are contingent because they are
uncertain in timing or amount. However, within this Standard the
term ‘contingent’ is used for liabilities and assets that are not
recognized because their 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. In addition, the
term ‘contingent liability’ is used for liabilities that do not meet the
recognition criteria.
• This Standard distinguishes between:
(a) provisions – which are recognized as liabilities (assuming
that a reliable estimate can be made) because they are present
obligations and it is probable that an outflow of resources
embodying economic benefits will be required to settle the
obligations; and
(b) contingent liabilities – which are not
recognized as liabilities because they are either:
(i) possible obligations, as it has yet to be
confirmed whether the entity has a present
obligation that could lead to an outflow of
resources embodying economic benefits; or
(ii) present obligations that do not meet the
recognition criteria in this Standard (because
either it is not probable that an outflow of
resources embodying economic benefits will be
required to settle the obligation, or a sufficiently
reliable estimate of the amount of the obligation
cannot be made).
 8. Recognition
1. Provisions:
A provision shall be recognized when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognized.
2. Present Obligation
It will normally be clear whether a past event has given rise to a present obligation. An
undertaking determines whether a present obligation exists, at the balance sheet date,
by taking account of all evidence, including the opinion of experts.
The evidence includes any extra evidence provided by events after the balance sheet date.
On the basis of such evidence;
a). where it is more likely than not that a present obligation exists at the end of the
reporting period, the entity recognizes a provision (if the recognition criteria are met);
and
(b) where it is more likely that no present obligation exists at the end of the reporting
period, the entity discloses a contingent liability, unless the possibility of an outflow
of resources embodying economic benefits is remote.
3. Past events
A past event that leads to a present obligation is called an obligating event. For
an event to be an obligating event, it is necessary that the entity has no
realistic alternative to settling the obligation created by the event. This is the
case only:
(a) where the settlement of the obligation can be enforced by law; or
(b) in the case of a constructive obligation, where the event (which may
be an action of the entity) creates valid expectations in other parties that the
entity will discharge the obligation.
4. Contingent liabilities
a). An entity shall not recognize a contingent liability.
b). A contingent liability is disclosed, as required by paragraph 86, unless the
possibility of an outflow of resources embodying economic benefits is
remote.
5. Contingent Assets
a) An entity shall not recognize a contingent asset.
b) A contingent asset is disclosed, as required by paragraph 89, where an
inflow of economic benefits is probable.
 9. Measurement
Measurement is an issue central to recognition, IAS 37 lays down certain principles
for measurement of a provision (i.e. Do’s and Don'ts) these are given in the table
below;
Principles for measurement of provision
Sl. Do’s Dont’s
No.
1. Best Estimate: The amount recognized Not to be on Present Value basis:
as provision should be the best estimate The provision amount should not be
of the expenditure required to settle the discounted to its present value.
present obligation at the balance sheet
date.
2. Judgment Management: The amount Not to be excessive: Although
of provision should be based on the reasonable caution is necessary in
judgments of the management. These making estimates of provision,
judgments should be supplemented by; provisions should not be excessive.
a). Past experience of similar
transactions
b). Reports of independent experts
3. Pre-tax basis: Provisions should be Gains not to be netted off from
measured on pre-tax basis. provision: Gains from expected
disposals of assets are not to be
netted off from provisions even if
the expected disposal is closely
linked to the event giving rise to
provision. Instead, such gains should
be recognized at the time specified
by concerned IAS.
4. Effect of future events: Effects of Not to be net of reimbursement in
future events that may affect the the Balance sheet: If some or all or
amount required to settle the obligation expenditure required to settle a
should be considered in estimating a provision is expected to be
provision if there is objective evidence reimbursed by another party, the
that the events will occur. reimbursement to be recognized only
if the receipt of it is virtually certain
on settlement of obligation by the
enterprise. The reimbursement
should be treated as a separate asset
and not to be netted off with
provision in balance sheet.
Restructuring: A restructuring is a programme that is planned and
controlled by the management. It materially changes either:
1. The scope of business undertaken by an entity
2. The manner in which that business is conducted
The following are examples of events which may satisfy the definition
of restructuring:
1. Sale or termination of a line of business
2. Closure of business locations
3. Relocation of business activities from one region/country to
another
4. Change in management structure
5. Fundamental re-organizations whose material effect is on the
nature and forms of operations-
a). A provision for restructuring costs should be recognized only
when the recognition criteria for provision are met
b). A restructuring should include only the direct
expenditures arising from the restructuring.
c). Expenditures related to future conduct of business
and are not liabilities for restructuring at the balance
sheet date should not be included in restructuring
provisions.
d). Identifiable future operating losses up to the date of
restructuring should not be included in the provision
e). Gains on expected disposal of assets should not be
considered in measuring the restructuring provision,
f). If a restructuring is a ‘discontinued operation’ within
the meaning of IAS 37, additional disclosures required
by IAS 37 should be given
Actual liability/ Asset V/S Contingent liability/asset
Changes of the Out of the enterprise Into the enterprise
flow of economic
benefit
a). If it is virtually Recognize as a Recognize as an asset
certain liability/provision
b). If it is probable Recognize as a It is a contingent asset not to be
liability/provision recognized but only to be disclosed
in the BOD / approving authorities
report and not in Financial report
c). If it is possible It is a contingent No disclosure no where
liability. Don’t
recognize but disclose
in the financial
statement
d). If it is remote No disclosure no where No disclosure no where
Disclosure: For each class of provision, an undertaking should disclose;
1. The carrying amount at the beginning and end of the period
2. Additional provisions made in the period, including increases to existing
provisions
3. Amounts used i.e. incurred, and charged against the provision during the
period
4. Unused amounts reversed during the period
5. The increase during the period in the discontinued amount arising from
the passage of time, and effect of any change in the discount rate
6. A brief description of the nature of the obligation, and the expected
timing of any resulting outflows of benefits
7. An indication of the uncertainties about the amount of timing of those
outflows and major assumptions made concerning future events
8. The amount of any expected reimbursement, stating the amount of any
asset that has been recorded for that reimbursement.