Wiley IFRS: Practical Implementation Guide and Workbook, 3rd Edition

Chapter 28

PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS (IAS 37)

BACKGROUND AND INTRODUCTION

This Standard prescribes rules regarding the recognition and measurement of provisions, contingent liabilities, and contingent assets, and also mandates disclosures in footnotes that would enable users of financial statements to comprehend their nature, timing, and amount.

Prior to the promulgation of IAS 37, in the absence of clear-cut rules of recognition and measurement, entities could charge huge provisions to profit or loss (often referred to as big bath provisions) and thereby manipulate earnings or financial performance.

It is worth noting that previously the term “provisions” was used very loosely in financial reporting. With the enactment of IAS 37, rules with respect to recognition and measurement of provisions, contingent liabilities, and contingent assets have been codified. Since then, entities preparing financial statements in accordance with International Financial Reporting Standards (IFRS) used these terms strictly based on their prescribed definitions under IAS 37. Furthermore, IAS 37 also has clarified certain misconceptions about the term “provision.” For instance, “provisions” that are envisioned by this Standard are now “liabilities” (of uncertain timing or amount). The “provision for depreciation” and the “provision for doubtful debts” are really not provisions according to this Standard but are contra accounts or adjustments to the carrying value ...