PAS 34

Provision, Contingent
Liability and Asset
Conceptual Framework &
Accounting Standards

ma. angelica c. balatucan, msa, cpa

 1
Provision
 Provision
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.
macbalatucan,msa,cpa2023
 2
Recognition
 Recognition
Provision shall be recognized as a liability in
the financial statements under the following
conditions:
a) The 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 would be
required to settle the obligation.
c) The amount of the obligation can be
measured reliably. macbalatucan,msa,cpa2023
 Examples of Provision
❑ Warranties
The best estimate of the warranty cost is recognized as a provision
because there is a clear constructive obligation arising from an
obligating event which is the sale of the product with warranty.
❑ Environmental contamination
If an entity has an environmental policy such that other parties
would expect the entity to clean up any contamination, or if the
entity has broken current environmental legislation, a provision for
environmental damage shall be made.
The obligating event is the contamination of the property which
give rise to constructive or legal obligation. A provision is
recognized for the best estimate of the cost of cleaning up the
contamination.
macbalatucan,msa,cpa2023
 Examples of Provision
❑ Decommissioning or abandonment costs
When an oil entity initially purchases an oil field, it is put under legal
obligation to decommission the site at the end of its life. The costs
of abandonment or decommissioning shall be recognized as a
provision and may be capitalized as cost of the oil field.
❑ Court case
After a wedding in the current year, ten people died possibly as a
result of food poisoning from the products sold by the entity. Legal
proceedings are started seeking damages from the entity.
When the entity prepares the financial statements for the current
year, the lawyers advise that owing to the developments in the
case, it is probable that the entity would be found liable. A provision
is recognized for the best estimate of the damages because there
is a present obligation. macbalatucan,msa,cpa2023
 Examples of Provision
❑ Guarantee
In the current year, an entity gives a guarantee of certain
borrowings of another entity. During the year, the financial
condition of the borrower deteriorates and at year-end, the
borrower files a petition for bankruptcy. A provision is recognized
for the best estimate of the guarantee obligation because there is
a legal obligation arising from the obligation event which is the
guarantee.

macbalatucan,msa,cpa2023
 3
Measurement
 Measurement
❑ The amount recognized as a provision
should be the best estimate of the
expenditure required to settle the present
obligation at the end of the reporting
period.
❑ The best estimate is the amount that an
entity would rationally pay to settle the
obligation at the end of the reporting
period.
macbalatucan,msa,cpa2023
 Measurement
What is the best estimate?
❑ Where there is continuous range of possible
outcomes - midpoint of the range
❑ Where a single obligation is being measured –
individual most likely outcome adjusted for the
effect of other possible outcomes
❑ Where the provision being measured involves a
large population of items – “weighting” all
possible outcomes by their associated
possibilities
macbalatucan,msa,cpa2023
 Measurement Considerations

❑ Risk and uncertainties

❑ Present value of obligation
❑ Future events (ex. New legislation and changes
in technology)
❑ 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.
macbalatucan,msa,cpa2023
 Measurement Considerations
❑ 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. macbalatucan,msa,cpa2023
 Measurement Considerations
❑ Changes in provision
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.
❑ Use of provision
Provision shall be used only for expenditures for
which the provision was originally recognized.
macbalatucan,msa,cpa2023
 Measurement Considerations
❑ Future operating losses
Provision shall not be recognized for future
operating losses.
❑ Onerous contract – a contract in which the
unavoidable costs of meeting the obligation
under the contract exceed the economic
benefits expected to be received under it.
If an entity has an onerous contract, the present
obligation under the contract shall be recognized
and measured as a provision.
macbalatucan,msa,cpa2023
 4
Contingent Liability
and Asset
 Contingent Liability
Contingent Liability
- Is a possible obligation that arises from past
event and whose existence will be confirmed
only by the occurrence or non-occurrence of
uncertain future events.
- Is also a probable obligation that arises from
past event BUT the amount of obligation
CANNOT be measured reliably.
- Is used for liabilities that DO NOT MEET the
recognition criteria
macbalatucan,msa,cpa2023
 Likelihood of Occurrence

❑ Probable
Future event is more likely than not to occur (i.e.
the probability that the event will occur is
greater than the probability that it will not).
❑ Reasonably possible
The future event is less likely to occur.
❑ Remote
The future event is least likely to occur.

macbalatucan,msa,cpa2023
 Provision Vs. Contingent Liability
Provision Contingent liability

• Present obligation • Possible obligation

• BOTH probable AND reliably • Present obligation which either

measured probable or reliably measurable
but NOT BOTH

• Recognized (accrued in the SFP) • Not recognized (NOT accrued in

the SFP) but rather DISCLOSED in
the notes to financial statements

macbalatucan,msa,cpa2023
 Treatment of Contingent Liability
A contingent liability shall not be recognized in
the financial statements but shall be disclosed
only. The required disclosures are:
a. Brief description of the nature of the contingent
liability
b. An estimate of its financial effects
c. An indication of the uncertainties that exist
d. Possibility of any reimbursement

If a contingent liability is remote – no disclosure is

necessary. macbalatucan,msa,cpa2023
 Contingent Asset

A contingent asset is a possible asset that arises

from past event 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.

A contingent asset shall not be recognized

because this may result to recognition of income
that may never be realized.
macbalatucan,msa,cpa2023
 Contingent Asset
However, when the realization of income is virtually
certain, the related asset is no longer contingent
asset and its recognition is appropriate.

If a contingent asset is probable – disclosure only

(includes a brief description of the contingent
asset and estimate of its financial effects)

If contingent asset is possible or remote – no

disclosure is required
macbalatucan,msa,cpa2023
 Summary
If the If the Accounting treatment
Accounting treatment
liability is asset is

Virtually Virtually Recognized as an asset

certain Recognized as a provision certain (journalized)
Probable and accrued (journalized) Probable Considered a contingent asset
and disclosed only
Possible Considered a contingent Possible
liability only and disclosed Considered as a contingent
only asset
but no recognition (no journal
Remote No recognition nor Remote entry) nor disclosure
disclosure

macbalatucan,msa,cpa2023
 Summary
Accounting treatment for the LIABILITY Accounting treatment for the ASSET
Likelihood
Accrue Likelihood of Accrue
of
(recognize in Disclose Ignore occurrence (recognize Disclose Ignore
occurrence
the FS) in the FS)

Probable ✓ Virtually certain ✓

and reliably (provision) and reliably (treated as
Measurable Measurable an asset)
Probable ✓ Virtually certain
but NOT (contingent but NOT reliably ✓
(contingent
reliably liability) Measurable
asset)
measurable
Possible ✓ Probable ✓
(Reliably (contingent (Reliably (contingent
measurable liability) measurable or asset)
or Not) Not)

Remote ✓ Possible/ ✓
(contingent Remote macbalatucan,msa,cpa2023
(contingent
liability) asset)
End of Lesson