1. Workshop on IFRS
KKTulshan

2. Provisions, Contingent Liabilities and Contingent Assets
IAS 37
Provisions,
Contingent Liabilities and Contingent Assets

3. IAS 37 v AS 29 IAS 37 AS 29 Constructive obligation Discounting
No guidance

4. Objective Ensure that appropriate Are applied to
Recognition criteria and
Measurement bases
Are applied to
Provisions
Contingent liabilities and
Contingent assets
And that sufficient information is disclosed in the notes to understand their
Nature
Timing and
Amount

5. Exclusions Executory contracts unless onerous contracts
Covered by other standards
IAS 11 : Constructions Contracts
IAS 12 : Income-taxes
IAS 17 : Leases
IAS 19 : Employee Benefits
IAS 39 : Financial instruments
IFRS 4 : Insurance Contracts
How about provisions for
Depreciation,
Impairment of assets, and
Provisions for doubtful debts?

6. Provisions
Provisions

7. Definitions A provision A liability is a liability
of uncertain timing or amount.
A liability
is a present obligation of the entity
arising from past events,
the settlement of which
is expected to result in an outflow from the entity
of resources embodying economic benefits

8. Distinction – Provisions v Other liabilities
A provision is a liability of uncertain amount or timings
Trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier
Accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees
Accruals are often reported as part of trade and other payables
Provisions are reported separately

9. Recognition
A provision shall be recognized when all the following three conditions are met.
Condition 1: An entity has a present obligation (legal or constructive) as a result of a past event
Condition 2: It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
Condition 3: a reliable estimate can be made of the amount of the obligation

10. Recognition – Condition 1
An entity has,
as a result of a past event,
a present obligation (legal or constructive).

11. Recognition – Condition 1
Past Event
The past event is known as obligating event
An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation
When no realistic alternative exists:
When settlement can be enforced by law; or
When the event creates valid expectations.

12. Recognition – Condition 1
Present obligation could be of two types: legal or constructive
A legal obligation is an obligation that derives from
A contract (through its explicit or implicit terms)
Legislation; or
Other operation of law
Examples:
A constructive obligation is an obligation that derives from an entities actions where:
By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities

13. Recognition – Condition 1
Probability of a present obligation
In almost all cases it will be clear that past event has given rise to present obligation
In rare cases it is not clear whether there is a present obligation
Apply probability criteria
More likely than not
Consider all available evidence
Additional evidence – events after reporting date
Obligation should exists independently of entity’s future action.

14. Recognition – Condition 2
Probable outflow of economic outflows
Probable means more likely than not

15. Recognition – Condition 3
Reliable estimate
Rationally pay
Third party
Best estimate
Consider
Risks and uncertainties
Present Value
Future Events
Ignore
Expected disposal of assets
Reimbursements

16. Measurement – General Rules
Best estimate
Risks and uncertainties
Present Value
Future Events
Expected disposal of assets
Reimbursements

17. Measurement – Best Estimate
The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period
The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time

18. Measurement – Risks and uncertainties
The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision
A risk adjustment may increase the amount at which a liability is measured
Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated
Uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities

19. Measurement – Present Value
Where the effect of time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation

20. Measurement – Future Events
It is only those obligations arising from past events existing independently of an entity’s future actions (ie the future conduct of its business) that are recognized as provisions
Future events that may effect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occur
Examples
Expected cost reductions associated with increased experience in applying existing technology
However, an entity does not anticipate the development of a completely new technology unless it is supported by sufficient objective assessment
The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that legislation is virtually to be enacted

21. Measurement – Expected disposal of assets
Gains from expected disposal of assets shall not be taken into account in measuring a provision

22. Measurement - Reimbursements
The reimbursements shall be recognized when, and only when, it is virtually certain that reimbursements will be received if the entity settles the obligation
The reimbursement shall be treated as a separate asset
The amount recognized for the reimbursements shall not exceed the amount of the provision

23. Changes in provision
Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate
If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, reverse the provision
If there is no longer uncertainty about timing and amount, the provision becomes a liability

24. Use of provisions
A provision shall be used only for expenditures for which the provision was originally recognized.

25. Discussion 1 - Warranties
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 sale. On past experience, it is probable (ie more likely than not) that there will be some claims under the warranties.

26. D1 – Warranties – Solution
Present obligation as a result of a past obligating event:
The obligating event is the sale of the product with a warranty which gives rise to a legal obligation
An outflow of resources embodying economic benefits in settlement:
Probable for the warranties as a whole
Conclusion:
A provision is recognized for the best estimate of the costs of making good under the warranty products sold before the end of the reporting period

27. Discussion 2 – Contaminated land – legislation virtually certain to be enacted
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 31st March 2009 it is virtually certain that a draft law requiring clean-up of land already contaminated will be enacted shortly after the year-end.

28. D2 – Contaminated land – legislation virtually certain to be enacted - Solution
Present obligation as a result of a past obligating event:
The obligating event is the contamination of the land because of the virtual certainty of legislation requiring clean-up
An outflow of resources embodying economic benefits in settlement:
Probable
Conclusion:
A provision is recognized for the best estimate of the costs of the clean-up.

29. Discussion 3 – Contaminated land and constructive obligation
An entity in the oil industry causes contamination and operates in a country where there is no environment 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.

30. D3 – Contaminated land and constructive obligation
Present obligation as a result of a past obligating event:
The obligating event is the contamination of the land, which gives rise to a constructive obligation because the conduct of the entity has created a valid expectation on the part of those effected by it that the entity will clean up contamination.
An outflow of resources embodying economic benefits in settlement:
Probable
Conclusion:
A provision is recognized for the best estimate of the costs of the clean-up.

31. Discussion 4 – Offshore oilfield
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 percent of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, and ten percent arise through the extraction of oil. At the end of the reporting period, the rig has been constructed but no oil has been extracted.

32. D 4 – Offshore oilfield
Present obligation as a result of a past obligating event:
The construction of the oil rig creates a legal obligation under the terms of the license to remove the rig and restore the seabed and is thus an obligating event. At the end of the reporting period, however, there is no obligation to rectify the damage that will be caused by extraction of oil.
An outflow of resources embodying economic benefits in settlement:
Probable
Conclusion
A provision is recognized for the best estimate of 90% of the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it. These costs are included as part of the cost of the oil rig. The 10% of costs that arise through the extraction of oil are recognized as a liability when the oil is extracted.

33. Discussion 5 – Refunds Policy
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.

34. D 5 – Refunds Policy
Present obligation as a result of a past obligating event:
The obligating event is the sale of the product, which gives rise to a constructive obligation because the conduct of the store has created a valid expectation on the part of its customers that the store will refund purchases
An outflow of resources embodying economic benefits in settlement:
Probable
Conclusion:
A provision is recognized for the best estimate of the costs of refunds

35. Discussion 6 – A court case
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 authorisation 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 found liable. However, when the entity prepares the financial statements for the year to , its lawyers advise that, owing to developments in the case, it is probable that the entity will be found liable.

36. D 6 – A court case – At
Present obligation as a result of a past obligating event:
On the basis of the evidence available when the financial statements were approved, there is no obligation as a result of past events.
Conclusion:
No provision is recognised.
The matter is disclosed as a contingent liability unless the probability of any outflow is regarded as remote

37. D 6 – A court case – At
Present obligation as a result of a past obligating event:
On the basis of the evidence available, there is a present obligation.
An outflow of resources embodying economic benefits in settlement:
Probable.
Conclusion:
A provision is recognised for the best estimate of the amount to settle the obligation.

38. Discussion 7 – Refurbishment costs – no legislative requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the end of the reporting period, the lining has been in use for three years.

39. D 7 – Refurbishment costs – no legislative requirement
Present obligation as a result of a past obligating event:
There is no present obligation.
Conclusion:
No provision is recognised
The cost of replacing the lining is not recognised because,
at the end of the reporting period, no obligation to replace the lining exists independently of the company’s future actions—
even the intention to incur the expenditure depends on the company deciding to continue operating the furnace or to replace the lining.
Instead of a provision being recognised, the depreciation of the lining takes account of its consumption, ie it is depreciated over five years. The re-lining costs then incurred are capitalised with the consumption of each new lining shown by depreciation over the subsequent five years.

40. D 8 – Refurbishments costs – legislative requirement
An airline is required by law to overhaul its aircraft every three years.

41. Discussion 8 – Refurbishments costs – legislative requirement
Present obligation as a result of a past obligating event:
There is no present obligation.
Conclusion:
No provision is recognised.
The costs of overhauling aircraft are not recognised as a provision for the same reasons as the cost of replacing the lining is not recognised as a provision in preceding discussion.
Even a legal requirement to overhaul does not make the costs of overhaul a liability, because
no obligation exists to overhaul the aircraft independently of the entity’s future actions—the entity could avoid the future expenditure by its future actions, for example by selling the aircraft.
Instead of a provision being recognised, the depreciation of the aircraft takes account of the future incidence of maintenance costs, ie an amount equivalent to the expected maintenance costs is depreciated over three years.

42. Disclosures For each class of provision, an entity shall disclose:
the carrying amount at the beginning and end of the period;
additional provisions made in the period, including increases to existing provisions;
amounts used (ie incurred and charged against the provision) during the period ;
unused amounts reversed during the period ; and
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.
Comparative information is not required.

43. Disclosures - contd
An entity shall also disclose the following for each class of provision:
a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;
an indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an entity shall disclose the major assumptions made concerning future events; and
the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.

44. Contingent Liabilities

45. Definition A contingent liability is
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
A present obligation that arises from past events but is not recognized because:
It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
The amount of obligation cannot be measured with sufficient reliability

46. Provisions v Contingent Liabilities
Both are uncertain in timing or amount
Contingent liability is dependant on occurrence or non-occurrence of one / more uncertain future events not in control of entity

47. Recognition
An entity shall not recognize a contingent liability

48. Disclosures
Unless the possibility of any outflow in settlement is remote,
an entity shall disclose for each class of contingent liability at the end of the reporting period
a brief description of the nature of the contingent liability and, where practicable:
an estimate of its financial effect;
an indication of the uncertainties relating to the amount or timing of any outflow; and
the possibility of any reimbursement.

49. Contingent Assets
Contingent Assets

50. Definition
A contingent asset is 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

51. Recognition
An entity shall not recognize a contingent asset

52. Disclosures Where an inflow of economic benefits is probable,
an entity shall disclose
a brief description of the nature of the contingent assets at the end of the reporting period, and,
where practicable, an estimate of their financial effect.
It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of income arising.

53. krishankt@cybermedia.co.in 9810013524
Thank You

54. IFRIC 1

55. Scope
Changes in measurement of any existing decommissioning, restoration or similar liability that is
Recognized as part of the cost of PPE – as per IAS 16
Recognized as a liability – as per IAS 37

56. Cost Model Add / deduct to carrying amount
Test for impairment – if add to carrying amount

57. Revaluation Model Adjust from Revaluation Surplus
Any excess / deficit to PL

58. Unwinding of Discount
Finance Cost
Recognize in PL