A review of the key concepts and principles of International Accounting Standard 37 (IAS37) on Provisions, Contingent Liabilities and Contingent Assets.
The course includes theoretical principle lectures including a Standard on a page (SOAP) summary. These principles are then illustrated practically in class examples that focus on journalising the recognition and measurements principles contained in the standard.
You will need to download the lecture slides and work through the lecture videos and the class examples.
The course is structured to assist three categories of delegates who require knowledge of International Financial Reporting Standards (IFRS):
The Tabaldi approach is practical and our lecturers focus on making the sometimes complex principles of financial reporting simple and practical.
You will need to engage with the lecturer with pen in one hand and calculator in the other, mental application and a proactive approach will ensure that you master this topic under financial reporting and accounting.
Click the above heading link to download the IAS 37 Provisions, contingent liabilities and contingent assets lecture handout notes and summaries to download for lecture video completion.
Please note that the layout is set as one slide per page (a total of 103 slides), and for printing it may be cost beneficial to print multiple slides per printed page. We suggest printing 4 pages per one printed page in landscape to minimise your printing costs.
A theoretical lecture video describing the principles of IAS 37 including a standard on a page (SOAP) for IAS 37
Can you identify liabilities that are provisions? This video class example discusses a number of items that will help you work through the principles of identifying provisions. This is by no means a complete example, but will get you starting to think about the recognition criteria for provisions
This video is based on the decision tree provided within the standards, and will assist you in the application of a logical process for classification of provisions (recognition) versus contingent liabilities (disclosure in notes only).
Can you differentiate between provisions and contingent liabilities? This class example provides a discussion in which you will need to classify an obligation as either a provision or a contingent liability.This specific class example covers the scenario where you have a legal claim instituted against you.
Provisions can be distinguished from other liabilities such as trade payables and accruals. This video discusses the conceptual difference that relates to the levels of uncertainty of timing and amount of cash flows required to settle the obligation. The video will also cover provisions versus accruals specifically, these two items can be confusing. Remember, a provision is still a liability and is recognised in the statement of financial position!
This video discussed the recognition criteria for provisions in IAS 37, as well as the disclosure of contingent liabilities.Remember that a provision is a liability of uncertain timing or amount, but is STILL A LIABILITY. Therefore there must be a present obligation and future outflows that are probable.
This video provides an overview of the initial and subsequent measurement of provisions in terms of IAS 37. The concepts are further elaborated in subsequent videos.
The previous video gave a high level overview of the measurement principles for provisions. This video will elaborate on the more important issues relating to INITIAL MEASUREMENT, including the best estimate concept, incorporating risk and uncertainty, discounting to present value, consideration of future events today, and whether or not to include gains from disposal of assets into the provision
Can provisions change subsequent to initial recognition? Most definitely YES! Remember that provisions are based on estimates, and as time passes those estimates will probably change. Provisions are also usually discounted at the previous reporting date, and therefore you will need to "unwind" interest and increase the provision balance going forward. This video discusses these changes to provisions in a simple way to make sure you understand how to account for the above.
Are you allowed to recognise a general provision or offset unrelated expenses against provisions? The answer is NO on both accounts, provisions may only be used against expenses for which they were specifically created, and you can NEVER raise a general provision!
A class example video taking you through the initial and subsequent measurement of a provision, including a change in estimate. Make sure you work through the example with the lecturer interactively in order to master the journals and accounting treatment.
What is a contingent asset, and what is the effect on the Financial Statements? Remember that contingent assets are NOT recognised, but only disclosed in the notes to the financial statements when the POSSIBLE inflow of future economic benefits is PROBABLE
Can you offset a reimbursement asset against the original provision being reimbursed? NO you cannot, you must recognise a serparate asset when the future economic benefits are virtually certain.Is the same true for offsetting the original expense in profit or loss? YES it is, you must offset the profit or loss movement against the original expense linked to the provision being reimbursed.
Can you recognise future operating losses as a provision?The answer is definitely NO! The reason is that there is no present obligation and therefore does not meet the definition of a liability (and therefore not a provision).You do have to consider a few other potential accounting effect such as the need for impairment of related assets and whether or not there may be an onerous contract.
Can you recognise future operating losses as a provision? The answer is definitely NO! The reason is that there is no present obligation and therefore does not meet the definition of a liability (and therefore not a provision). You do have to consider a few other potential accounting effect such as the need for impairment of related assets and whether or not there may be an onerous contract.
Can you provide for future losses on contracts where the future outflows are expected to exceed any future benefits associated with the contract? The theory on providing for future operating losses says no, but when the losses are associated with a contract there is a past obligating event, namely the contract! So if there is an onerous contract, you must provide for all the losses today and not as the losses occur in the future. Remember, raise the provision at the lower of the net least cost of exiting the contract (NB consider the option of exiting the contract and paying penalties instead of continuing at a loss).
This example illustrates the scenario where the market prices of inputs for the production process decrease subsequent the signing of an agreement with suppliers. It is important to remember that the assessment of an onerous contract looks at the unavoidable costs as compared to the future economic benefits, ie it is only onerous if the costs are greater than the income.
This short example illustrates the assessment of contracts as being onerous if the cost of inputs change, but the output (final product) is still sold at a profit.
This example illustrates a common source of onerous contracts - leases. In this example you will apply the theory and focus on the recording of the onerous contract as well as the journals subsequent to initial recognition.
Can you raise a provision for restructuring costs?
The answer is yes if certain criteria are met and there is an obligation (usually a constructive obligation). The tricky part is which costs? Look for directly attributable costs that are unavoidable and do not relate to ongoing activities!
A note to read on expenditures that are to be included in restructuring provisions, as well as items that are to be excluded. NB Read through this listing before proceeding.
An illustrative class example video to help you apply the theory you have just learnt regarding restructuring provisions. This example answers the question; which costs do I include in the restructuring provision?
A reading list of other examples of provisions with some guidance notes, definitely a worthwhile read to get a well rounded feel for different types of provisions.
A continuation of the reading list of examples of different types of provisions along with notes to make you think about the recognition of the provision.
Is there a present obligation regarding future rehabilitation, dismantling or decommissioning costs? The answer is yes, if there is a contractual or legal right to do so. Sometimes there may also be a constructive obligation if public expectations are created! The tricky thing is what do we do with the Debit? this is an IAS 16 issue as well as an IFRIC 1 discussion regarding subsequent changes in the provision.
A video illustrating the application of IAS 37 to provisions for warranties. Remember a warranty is defined as : "A written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair or replace it if necessary within a specified period of time." What is the past obligating event? If you think about it the answer is simple, the sale of the product comes with a warranty, therefore the event is the sale!
What are the disclosure requirements in the notes to the financial statements for provisions, contingent liabilities and contingent assets? This video will give you insight as to the disclosure requirements of IAS 37. Remember, Provisions are recognised in the SFP, but contingent liabilities and assets are NOT!
Under supplementary material I have uploaded xtracts from the Ernst And Young illustrative financial statements - Good Group (international) Limited.
We have extraced the statement of financial position (note that Provisions are separated from other liabilities), the provisions accounting policy (policy 5) and note 26 on Provisions and Contingent Liabilities.
The full set of illustrative financials can be found at:
Tabaldi Education is an organisation that specialises in Accounting and Financial Reporting training and consulting.
Our lecturing team at Tabaldi consists of a group of highly qualified Chartered Accountants who have lectured at undergraduate and postgraduate level, as well as having presented professional accounting training around the world.
Richard Starkey one of Tabaldi's leading lecturers has had years of experience lecturing and consulting for large international corporates, including the big four audit firms within South Africa. Listed companies in Europe, Africa and the Middle East. Richard is passionate about helping people master the basic principles of financial reporting, and takes an interactive journal driven approach to his lectures.