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IAS 37 - Slides

IAS 37 outlines the recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets. A provision is defined as a liability with uncertain timing or amount, requiring a present obligation from past events, while contingent liabilities and assets are defined based on uncertain future events. The standard emphasizes the importance of best estimates in measuring provisions and provides guidance on journal entries for recording these liabilities.

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49 views18 pages

IAS 37 - Slides

IAS 37 outlines the recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets. A provision is defined as a liability with uncertain timing or amount, requiring a present obligation from past events, while contingent liabilities and assets are defined based on uncertain future events. The standard emphasizes the importance of best estimates in measuring provisions and provides guidance on journal entries for recording these liabilities.

Uploaded by

zolisasibande10
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IAS 37 – Provisions, Contingent

Liabilities and Contingent Assets


UNIT LEARNING OUTCOMES
• Be able to apply the definition of a provision as per IAS 37

• Be able to measure a provision as per IAS 37

• Be able to recognise of a provision in the accounting records

• Be able to define a contingent asset

• Be able to define a contingent liability


OBJECTIVES OF IAS 37
• The Standard seeks to explain how to recognise, measure
and disclose liabilities, provisions and how to disclose
contingencies

• To distinguish between a liability, a provision and a


contingency the application of the liability definition and
recognition criteria will be assessed
Definition
• What is a provision?

IAS 37.10 defines a provision as

 A liability of uncertain timing or amount

The are 2 elements that are present in terms of a provision

1. A liability must be present


2. Either the amount or the timing is uncertain
Ia
Definition
• Is the a liability?

For a there to a be a liability the definition needs to be


met

 A present obligation

 Past Event

 Outflow/Transfer of future economic benefits

Ia
Definition
• Present Obligation?
For there to be present obligation there must be a
obligating event

There a 2 types of obligations


1. Legal obligation - is an obligation that is derived from a contract,
legislation or other operation of law
2. Constructive obligation – is an obligation that derives from an entity’s
actions where
By past practice, published policies or specific current
statement, the entity has indicated that it
will accept responsibility and
as a result created a valid expectation that it will discharge those
responsibilities
Example 1
ABC Ltd is retail company that sell electronic goods. It’s the company’s
policy to sell sells goods with a warranty.

Under the terms of the warranty the customer can return a faulty product
for repairs or replacement within a prescribed period.

REQUIRED

In terms of the IAS 37, does the above constitute a provision or or not?
Example 1
Scenario Answer
Definition of a liability: A present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow of the entity’s resources embodying economic benefits.

• There is a Present obligation:


 The entity has a duty (obliged) to replace or repair the faulty product sold to the
entity has no practical ability to avoid the repair/replacement because of the
warranty policy between the entity and the customer.
 NB: This is a legal obligation because of the policy

• The Past event:


 Past event - is the event that creates the obligation that the entity has no realistic
alternative but to settle.
 The sale with warranty, is the event that creates the obligation

• Outflow/Transfer of future economic benefits:


 The entity is required use it resources to replace/replace the faulty goods sold, the
entity does not know when it will have to settle the obligation or what the
amount would be to settle the obligation

Therefore, the above can be recognised as a provision


Measurement
IAS 37 states that the amount recognised as a provision shall be the best
estimate of the expenditure required to settle the present obligation at the
end of the reporting period (IAS 37.36)

How do we determine “Best Estimate”

 Management’s professional judgement


 Previous experience with similar transactions
 Independent expert advice, if available
 Events after reporting period
After considering
 Risks and uncertainties
 Discounting the provision if time value of money is material
 Future Events
Measurement
In FAC1 we will consider 2 methods of determining the best estimate

Best Estimate

Expected Value Most Likely


Method Outcome Method

- Large Population of Items - Single population


- There is range of possible - The individual most likely
outcomes outcome may be the best
- Each outcome is weighted estimate
on their individual
probabilities
Initial Recognition
How is a provision recorded in the accounting records?

Remember !!!

Provision = Liability
Increase >>> Cr

The Journal Entry


Description Class Debit Credit
Expense (Warranty repairs etc) SOPL XXXX
Provision (Provision for warranty) SOFP XXXX
Example 2
ABC Ltd is retail company that sell electronic goods. It’s the company’s
policy to sell sells goods with a warranty.

Under the terms of the warranty the customer can return a faulty product
for repairs or replacement within a prescribed period. After thorough
research and discussion with expert it was concluded that
• If minor repairs/replacements are detected than repair costs will amount
to R 500 000 for all items sold
• If major repairs/replacements are detected than repair costs will amount
to R 800 000 for all items sold

Based on the discussion with the expert it is estimated that 90% of goods
sold will have no defect,8% will have a minor defect and 2% will have a
major defect
Example 2

REQUIRED

In terms of the IAS 37, the above meets the requirements of a provision.
Provide the Journal Entry using the information above
Show all calculations
Classifications and narrations are required
Example 2
Definition a(Given)
Measurement
Method = Expected Value method(Range of possible outcomes)
Calculations =
Outcomes Calculation Amount
1. No defects R 0 x 90% R0
2. Minor Defects R 500 000 x 8% R 40 000
3. Major Defects R 800 000 x 2% R 16 000
R 56 000
Initial Recognition
Description Class Debit Credit
Warranty repairs SOPL R 56 000
Provision for warranty SOFP R 56 000
Provision for warranty raised
Example 3
ABC Ltd is retail company that sell electronic goods. It’s the company’s
policy to sell sells goods with a warranty.

Under the terms of the warranty the customer can return a faulty product
for repairs or replacement within a prescribed period. After thorough
research and discussion with expert it was concluded that the warranty
claim will amount to R 50 000

REQUIRED

In terms of the IAS 37, the above meets the requirements of a provision.
Provide the Journal Entry using the information above
Show all calculations
Classifications and narrations are required
Example 2
Definition a(Given)

Measurement
Method = Most likely amount (single obligation)
Amount = R 50 000

Initial Recognition

Description Class Debit Credit


Warranty repairs SOPL R 50 000
Provision for warranty SOFP R 50 000
Provision for warranty raised
Contingent Liability
Definition
- (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
recognised 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.

Initial recognition
An entity shall not recognise a contingent liability
Contingent Asset
Definition

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.

Initial recognition

An entity shall not recognise a contingent asset

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