1. Provision, Contingent Liabilities and Contingent Assets
HKAS 37
Provision, Contingent Liabilities and Contingent Assets

2. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

3. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
DEIFINITIONS
Provision: a liability of uncertain timing or amount.
Contingent liability:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
Contingent asset: a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

4. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
DEIFINITIONS – (cont)
Provisions <-> Other liabilities (e.g. AP, accruals)
~ Provisions: a liability of uncertain timing or amount
~ Liabilities: present obligation to transfer out economic benefits as a result of past event. (less uncertainty)
Provisions <-> Contingent liabilities
~ Provisions -> liability: present obligations and probable outflow of economic benefits
~ Contingent liabilities -> Not liability: a reliable estimate of the amount cannot be made.

5. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

6. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
RECONGITION
- Provision
Three conditions:
1) Present obligation as a result of past event
- consider additional evidence provided by events after BS date
 Present obligation exists at BS date => a provision
 No present obligation exists at BS date => contingent liabilities
2) Outflow of resources will be required
- Probable: P(event will occur) > P(event will not occur)
3) Reliable estimate of the amount
- use of estimates do not undermine their reliability
- liability exits that cannot be recognised: disclosed as a contingent liability

7. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
RECONGITION
- Contingent liabilities
~ Should not recognize
~ Should be disclosed
 unless possibility of occurrence is remote
 where an enterprise is jointly liable for an obligation, obligation that is expected to be met by other parties is treated as contingent liability

8. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
RECONGITION
- Contingent assets
~ Should not recognize
~ Should be disclosed
 where inflow of economic benefit is probable.
 if outflow of economic benefits is required, recognize as provision

9. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
RECONGITION
- Summary
Present obligation as a result of an obligating event? NO
Possible obligation?
YES
Probable outflow?
Remote?
Reliable estimate?
Provide
Disclose contingent liability
Do nothing.

10. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

11. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
MEASUREMENT
amount recognized being the BEST ESTIMATE of the expenditure required to settle the present obligation, determined by judgement, experience, reports from independent experts and additional evidence after the BS Risks and uncertainties
Taken into account RISKS AND UNCERTAINTIES
If effect of time value of money is material, PRESENT VALUE of expected future expenditures should be used
FUTURE EVENTS (e.g. new legislation) should be reflected in the amount of a provision
Gain on EXPECTED DISPOSAL OF ASSETS should NOT be taken into account in measuring a provision

12. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Scope
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

13. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
REIMBURSEMENTS
When expenditure required to settle a provision can be reimbursed by another party, then recognized as a separate assets, not exceed the amount of provision
In income statement, reimbursements can net off the expenses incurred and disclosed the net amount
If enterprise will remain liable for the whole amount if the other party fails to pay, then recognized the whole amount as liabilities and reimbursed amount as separate assets if receipt is certain
If enterprise will not be liable if the other party fails to pay, no liability should be recognized

14. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

15. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
CHANGES IN PROVISIONS
Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate
If it is no longer probable of outflow of resources, provision should be reversed

16. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

17. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
APPLICATION – Future Operating Losses
No provision should be recognized
Reasons:
- NOT liabilities
- DO NOT MEET general recognition criteria of provision
(i.e. present obligation, outflow of resources and reliable estimate)

18. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
APPLICATION – Onerous Contracts
Definition: a loss making contract where the costs to perform and complete the contract exceeds the revenue brought in by the contracts
Example:
A company rented a factory plant at HKD10,000/mth for 2 years at non-cancellable term. But after 1 year, it decided to move the manufacturing operation to China. Then the factory plant would be vacant but still rents have to be paid. This rental agreement would become an onerous contract.
Full provision would be made for the loss. (i.e. HKD 120k (HKD 10k x 12 mths) )

19. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
APPLICATION – Restructuring
Examples:
- sales / terminate a line of business
- closure of business locations in a country
- changes in management structure
- reorganizations to change nature and focus of the enterprise’s operations

20. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
APPLICATION – Restructuring (cont)
Recognize cost of restructuring as provision only when there is CONSTRUCTIVE OBLIGATION
Constructive obligation: there is a detail plan for restructuring including:
- Timing: when the restructuring take place
- Location: principal locations affected
- Personnel: employees who will be compensated for termination of service
- Event: business segment concerned
- Money: amount of expenditure involved

21. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
APPLICATION – Restructuring (cont)
Management intention to restructure before BS date does not give rise to constructive obligation unless:
- started to implement
- announced the main features of restructuring plan
- raise valid expectation of those affected
No obligation arises for the sale of an operation until there is a binding sale agreement

22. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
Definitions
Recognition
Measurement
Reimbursements
Changes in provisions
Application
Disclosure

23. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
DISCLOSURES
The carrying amount at the beginning and end of the period
Additional provisions made in the period, including increases to existing provisions
Amount s used (i.e. incurred and charged against the provision) during the period
Unused amounts reversed during the period
The increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate
For samples of disclosure please refer to Appendix D of HKAS 37

24. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 1
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sales. On past experience, it is probable that there will be some claims under the warranties.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  costs of making good under the warranty products sold before the BS date

25. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 2
An entity in the oil industry causes contamination but cleans up only when required to do so under the laws of the particular country in which it operates. One country in which it operates has had no legislation requiring cleaning up, and the entity has been contaminating land in that country for several years. At 31 December 2000 it is virtually certain that a draft law requiring a clean-up of land already contaminated will be enacted shortly after the year end.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  costs of the clean-up

26. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 3
An entity in the oil industry causes contamination and operates in a country where there is no environmental legislation. However, the entity has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. The entity has a record of honouring this published policy.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  costs of the clean-up

27. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 4
An entity operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. Ninety per cent of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, and ten per cent arise through the extraction of oil. At the BS date, the rig has been constructed but no oil has been extracted.
Present obligation as a result of a past obligating event Yes for oil rig
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  90%

28. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 5
An entity leases office premises where its lease requires it to reinstate the premises at the end of the lease. The eventual costs relate to the restoration of the alterations made to the premises. At the BS date, certain alterations have been made to the premise but the premises have not been put into use.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  cost relate to the restoration of the alterations made to the premises

29. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 6
A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  costs of refunds

30. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 7
On the board of an entity decided to close down a division. Before the BS date ( ) the decision was not communicated to any of those affected and no other steps were taken to implement the decision.
Present obligation as a result of a past obligating event No
Conclusion No provision is recognized

31. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 8
On the board of an entity decided to close down a division making a particular product. On a detailed plan for closing down the division was agreed by the board; letters were sent to customers warning them to seek an alternative source of supply and redundancy notices were sent to the staff of the division.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  costs of closing the division

32. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 9
Under new legislation, an entity is required to fit smoke filters to its factories by The entity has not fitted the smoke filters.
BS date 
Present obligation as a result of a past obligating event No
Conclusion No provision is recognized

33. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 10
Under new legislation, an entity is required to fit smoke filters to its factories by The entity has not fitted the smoke filters.
BS date 
Present obligation as a result of a past obligating event No
An outflow of resources embodying economic benefits in settlement Depends
Conclusion A provision is recognized  only for any fines and penalties that are more likely than not to be imposed

34. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 11
The government introduces a number of changes to the income tax system. As a result of these changes, an entity in the financial services sector will need to retrain large proportion of its administrative and sales workforce in order to ensure continued compliance with financial services regulation. At the BS date, no retraining of staff has taken place.
Present obligation as a result of a past obligating event No
Conclusion No provision is recognized

35. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 12
An entity operates profitably from a factory that it has leased under an operating lease. During Dec 2007 the entity relocates its operations to a new factory. The lease on the old factory continues for the next 4 years, it cannot be cancelled and the factory cannot be re-let to another user.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  unavoidable lease payments

36. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 13
An entity operates profitably from a factory that it has leased under an operating lease. During Dec 2007 the entity relocates its operations to a new factory. The lease on the old factory continues for the next 4 years, it cannot be cancelled and the factory can be used as a temporary godown generating a low level of income.
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  unavoidable lease payments – probable net revenue expected from godown operation

37. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 14
On , Entity A gives a guarantee of certain borrowings of Entity B, whose financial condition at that time is sound. During 2008, the financial condition of Entity B deteriorates and at Entity B files for protection from its creditors. At
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement No
Conclusion A guarantee is recognized at fair value

38. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 15
On , Entity A gives a guarantee of certain borrowings of Entity B, whose financial condition at that time is sound. During 2008, the financial condition of Entity B deteriorates and at Entity B files for protection from its creditors. At
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A guarantee is recognized at higher of best estimate of the obligation and the amount initially recognized less cumulative amortization

39. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 16
After a wedding in 2007,ten people died, possibly as a result of food poisoning from products sold by the entity. Legal proceedings are started seeking damages from the entity but it disputes liability. Up to the date of authorization of the financial statements for the year to for issue, the entity’s lawyers advise that it is probable that the entity will not be fond liable. However, when the entity prepares the financial statements for the year , its lawyers advise that, owing to developments in the case, it is probable that the entity will be found liable. At
Present obligation as a result of a past obligating event No
Conclusion No provision is recognized  contingent liablity

40. HKAS 37 Provision, Contingent Liabilities and Contingent Assets
EXAMPLE 17
After a wedding in 2007,ten people died, possibly as a result of food poisoning from products sold by the entity. Legal proceedings are started seeking damages from the entity but it disputes liability. Up to the date of authorization of the financial statements for the year to for issue, the entity’s lawyers advise that it is probable that the entity will not be fond liable. However, when the entity prepares the financial statements for the year , its lawyers advise that, owing to developments in the case, it is probable that the entity will be found liable. At
Present obligation as a result of a past obligating event Yes
An outflow of resources embodying economic benefits in settlement Probable
Conclusion A provision is recognized  amount to settle the obligation