Wiley International Trends in Financial Reporting under IFRS: Including Comparisons with US GAAP, Chinese GAAP, and Indian GAAP

CHAPTER 13

PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (IAS 37)

1. OBJECTIVE

1.1 This Standard ensures that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing, and amount. This Standard excludes from its scope obligations and contingencies that are covered by other International Financial Reporting Standards (IFRS).

2. SYNOPSIS OF THE STANDARD

This Standard, which aims to ensure that only present obligations arising from past obligating events (if they meet all criteria of recognition as required by the Standard) are recognized in the financial statements, is summarized next.

2.1 Provision is a liability of uncertain timing or amount.

2.2 An entity must recognize a provision if, and only if

• A present obligation (legal or constructive) has arisen as a result of a past event (which should be an “obligating event”),
• Outflow of resources is probable (i.e., “more likely than not”), and
• The amount to be recognized can be estimated reliably.

2.2.1 An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative but to settle the obligation.

2.2.2 A constructive obligation arises if past practice creates a valid expectation on the part of a third party. An example of this is the long-standing ...