Pas 37 - Provisions, Contingent Liab & Contingent Assets

CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
2019 Edition
Lecture Aid
By: Zeus Vernon B. Millan
1
PAS 37 Provisions, Contingent Liabilities and
Contingent Assets
Learning Competencies
• State the recognition criteria for provisions.

• Differentiate the accounting requirements
for a provision, a contingent liability and a
contingent asset.
• Describe the measurement of a provision.
Conceptual Framework & Acctg.

2
Standards (by: Zeus Vernon B. Millan)
Provisions
• A provision is a liability of uncertain timing or amount.
• Provisions differ from other liabilities because of the
uncertainty about the timing or amount of expenditure required
in settlement. Unlike for other liabilities, provisions must be
estimated. Although, some other liabilities are also estimated,
their uncertainty is generally much less than for provisions.
• Other liabilities, such as accruals, are reported as part of “Trade
and other payables” whereas provisions are reported
separately.

3
Provision vs. Contingent liability

4
Recognition of provisions
• A provision is recognized when all of the following conditions are

met:
1. The entity has a present obligation (legal or constructive) as a
result of a past event;
2. It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.

5
6
Measurement

7
Present value
• Where the effect of the 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.

8
Expected disposal of assets
• Gains from the expected disposal of assets shall not be

taken into account in measuring a provision. Gains shall
be recognized only when the assets are actually disposed
of.


9
Reimbursements
• Where some or all of the expenditure required in settling a

provision is expected to be reimbursed by another party, the
reimbursement is recognized only when it is virtually certain
that reimbursement will be received if the entity settles the
obligation.
• The reimbursement shall be treated as a separate asset.
• In the statement of profit or loss and other comprehensive income,
the expense relating to a provision may be presented net of the
amount recognized for a reimbursement.
10
Changes in provisions
• Provisions shall be reviewed at the end of each reporting

period and adjusted to reflect the current best estimate.
• If it is no longer probable that an outflow of resources

embodying economic benefits will be required to settle
the obligation, the provision shall be reversed.

11
Product warranties and guarantees
• If a customer has the option to purchase a warranty

separately (for example, because the warranty is priced or
negotiated separately), the warranty is accounted for in accordance
with PFRS 15 Revenue from Contracts with Customers.
• If a customer does not have the option to purchase a warranty

separately, the warranty is accounted for in accordance with PAS 37
Provisions, Contingent Liabilities and Contingent Assets unless the
promised warranty provides the customer with a service in addition to
the assurance that the product complies with agreed-upon
specifications.
12
Liability for premiums
• A customer option to acquire additional goods or services

for free or at a discount is accounted for under PFRS 15 if
the option provides the customer a material right that
the customer would not receive without entering into that
contract.
• A customer option that does not provide the customer with
a material right is not accounted for under PFRS 15; and
therefore, accounted for in accordance with PAS 37.
13
Guarantee for indebtedness of others
• A provision for the guarantee for indebtedness of others

is recognized when it becomes probable that the entity
will be held liable for the guarantee, such as when the
original debtor defaults on the loan.

14
Contingent assets

15
APPLICATION OF CONCEPTS

PROBLEM 2: FOR CLASSROOM DISCUSSION
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 16

OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

17
END
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 18

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CONCEPTUAL FRAMEWORK

• State the recognition criteria for provisions.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• A provision is recognized when all of the following conditions are

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• Where the effect of the time value of money is material,

Conceptual Framework & Acctg.

• Gains from the expected disposal of assets shall not be

Conceptual Framework & Acctg.

• Where some or all of the expenditure required in settling a

• Provisions shall be reviewed at the end of each reporting

• If it is no longer probable that an outflow of resources

Conceptual Framework & Acctg.

• If a customer has the option to purchase a warranty

• If a customer does not have the option to purchase a warranty

• A customer option to acquire additional goods or services

• A provision for the guarantee for indebtedness of others

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

PROBLEM 2: FOR CLASSROOM DISCUSSION

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 16

Conceptual Framework & Acctg.

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