Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed. The amount recognised for the reimbursement shall not exceed the amount of the provision. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future.
Other candidates may calculate an expected value based on the various probabilities which also would not be appropriate in these circumstances. This is where a company establishes an expectation through an established course of past practice. This rule has two parts, first the type of obligation, and second, the requirement for it to arise from a past event (ie something must already have happened to create the obligation).
Related IFRS Standards
Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made. Revenue from contracts with customers (see IFRS 15 Revenue from understanding operating margin Contracts with Customers). However, as IFRS 15 contains no specific requirements to address contracts with customers that are, or have become, onerous, this Standard applies to such cases. 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. In circumstances in which the containers are derecognised as part of the sale transaction, the obligation is an exchange of cash (the deposit) for the containers (non‑financial assets). Because the transaction involves the exchange of a non‑financial item, it does not meet the definition of a financial instrument in accordance with IAS 32.
Even when an entity has taken a decision to sell an operation and four tax scams to watch out for this tax season announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. Until there is a binding sale agreement, the entity will be able to change its mind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for impairment, under IAS 36.
IFRS Sustainability
Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase.
- Candidates are required to learn the three key criteria for a provision, as they are likely to have to explain these in an exam.
- Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met.
- Has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
- The final criteria required is that there needs to be a probable outflow of economic resources.
- Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material.
Approval by the Board of Onerous Contracts—Cost of Fulfilling a Contract issued in May 2020
Auditors are particularly watchful for contingent assets that have been recorded in a company’s accounting records, and will insist that they be eliminated from the records before issuing an auditor’s opinion on its financial statements. A contingent liability is disclosed, as required by paragraph 86, unless the possibility of an outflow of resources embodying economic benefits is remote. The Committee observed that if the tax deposit gives rise to an asset, that asset may not be clearly within the scope of any IFRS Standard. Furthermore, the Committee concluded that no IFRS Standard deals with issues similar or related to the issue that arises in assessing whether the right arising from the tax deposit meets the definition of an asset. The Committee concluded that the right arising from the tax deposit meets either of those definitions. The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability.
If candidates are able to do this, then provisions can be an area where they can score highly in the FR exam. This article will consider the aims of the standard, followed by the key specific criteria which must be met for a provision to be recognised. Finally, it will examine some specific issues which are often assessed in relation to the standard. For some ACCA candidates, specific IFRS® standards are more favoured than others.
Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. The key principle established by the Standard is that a provision should be recognised only when there is a liability i.e. a present obligation resulting from past events. The Standard thus aims to ensure that only genuine obligations are dealt with in the financial statements – planned future expenditure, even where authorised by the board of directors or equivalent governing body, is excluded from recognition. Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material. 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 (see paragraph 86).
The Committee observed that paragraph 47 of IAS 37 states that ‘risks specific to the liability’ should be taken into account in measuring the liability. The Committee noted that IAS 37 does not explicitly state whether or not own credit risk should be included. The Committee understood that the predominant practice today is to exclude own credit risk, which is generally viewed in practice as a risk of the entity rather than a risk specific to the liability. The request assumed that future cash flow estimates have not been adjusted for the entity’s own credit risk. Because of the time value of money, provisions relating to cash outflows that arise soon after the reporting period are more onerous than those where cash outflows of the same amount arise later. Other Standards specify whether expenditures are treated as assets or as expenses.
Provisions and other liabilities
This is where IAS 37 is used to ensure that companies report only those provisions that meet certain criteria. The ‘not-to-prejudice‘ exemption in IAS 37.92 also extends to contingent assets. Additionally, see the forum’s discussion regarding a scenario where a once-recognised contingent asset’s likelihood of resource inflow is no longer virtually certain. IFRS 9, as issued in July 2014, amended paragraph 2 and deleted paragraphs 97 and 98. Future events that may affect 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 occur. 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.
By 31 December 20X9, when Rey Co is required to make the payment, the liability should be showing at $10m, not $9.09m. Therefore, the liability is increased by 10% over the year, giving an increase of $910k which would be recorded in finance costs. EXAMPLE – best estimate Rey Co has received legal advice that the most likely outcome of the court case from the employee is that they will lose the case and have to pay $10m. They believe there is a 10% chance of having to pay $12m, and a 10% chance of paying nothing. IFRS Accounting Standards are, in effect, a global accounting language—companies in more than 140 jurisdictions are required to use them when reporting on their financial health.
The request noted that this was the basis required by IFRIC 3 Emission Rights, which was withdrawn in June 2005. The Committee received a request about how to account for deposits relating to taxes that are outside the scope of IAS 12 Income Taxes (ie deposits relating to taxes other than income tax). This Standard applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation, additional disclosures may be required by IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations.