IAS 37

Provisions, Contingent Liabilities and Contingent Assets

1Objective and scope

IAS 37 ensures 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 enable users to understand their nature, timing and amount.

2Key definitions

Provision

A liability of uncertain timing or amount.

Constructive obligation

An obligation that derives from an entity's actions, where an established pattern of past practice, published policy, or sufficiently specific current statement has created a valid expectation in other parties that it will discharge certain responsibilities.

Contingent liability

A possible obligation whose existence will be confirmed only by uncertain future events not wholly within the entity's control, OR a present obligation that is not recognised because an outflow of resources is not probable, or the amount cannot be measured reliably.

Contingent asset

A possible asset arising from past events, whose existence will be confirmed only by the occurrence of uncertain future events not wholly within the entity's control.

3Recognition and measurement

A provision is recognised only when all three conditions are met: the entity has a present obligation (legal or constructive) as a result of a past event; it is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount. It is measured at the best estimate of the expenditure required to settle the present obligation at the reporting date - the expected value where the provision covers a large population of items, or the single most likely outcome for an individual obligation, discounted to present value where the time value of money is material.

Situation	Provision, or disclose as contingent liability?
Present obligation, probable outflow, reliably estimable	Recognise a provision
Present obligation, but outflow not probable, or cannot be reliably estimated	Disclose as a contingent liability
Possible obligation depending on an uncertain future event	Disclose as a contingent liability
Remote possibility of an outflow	No provision, no disclosure required

A restructuring provision is recognised only when the entity has a detailed formal plan for the restructuring, and has raised a valid expectation in those affected that it will carry out the restructuring, typically by starting to implement the plan or announcing its main features to those affected; future operating losses are never provided for. An onerous contract (one where the unavoidable costs of meeting the obligations exceed the economic benefits expected from it) requires the present obligation under the contract to be recognised and measured as a provision.

4Presentation and disclosure

For each class of provision: a reconciliation of the carrying amount at the start and end of the period (additional provisions, amounts used, unused amounts reversed, the unwinding of the discount), a description of the nature of the obligation and expected timing, and details of any uncertainties
For each class of contingent liability, unless the possibility of an outflow is remote: a brief description of its nature, and, where practicable, an estimate of its financial effect and an indication of the uncertainties
Where an inflow of economic benefits is probable, a brief description of the nature of contingent assets at the reporting date, and an estimate of their financial effect

5Examinable focus

What KASNEB tests

A scenario listing several potential obligations (a pending lawsuit, a product warranty, a restructuring announcement, an onerous lease) and asking whether each is a provision, a contingent liability, or a contingent asset, with reasons, is a recurring KASNEB question format. Learn the three-part recognition test and the probable/possible/remote language precisely - the exam rewards using it exactly.