Contingent liabilities

The same standard is involved in a second and unrelated controversy about contingent liabilities and assets. The standard says that a contingent liability is a possible liability that does not meet the recognition criteria for a provision. A contingent liability is an obligation whose existence is not yet certain and is subject to some further event taking place, or it is less than probable that it will crystallize, or the amount is too uncertain to be recognized. A contingent liability under IAS 37 gives rise to a disclosure in the notes to the financial statements indicating its existence. At the moment many companies that operate in the US deal with ongoing litigation in this way.

However, the IASB’s proposed amendments to IAS 37 include a proposal to abandon contingent liabilities and assets as a separate item. The staff argument is that a contingent liability can be broken down into two elements: (1) an actual liability, and (2) a probability of it maturing, which should be recognized and measured at its expected value. For example, a legal claim for €100,000 following an industrial accident, which has a 20% chance of being awarded by the courts, should under the proposal be seen as requiring a provision of €20,000, rather than being an unrecognized contingent liability disclosure.

This proposal has not been enthusiastically received by commentators either. As is fairly usual with expected values, people say they are meaningless since they do not represent ...

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