IAS 37

Question 1

What is IAS 37?

Answer 1

It is provisions, contingent assets and contingent liabilities

Question 2

What is a provision?

Answer 2

A provision is a liability of uncertain timing or amount.

There is an obligation to make a payment.

Question 3

When do we recognise a provision?

Answer 3

When we satisfy the 3 criteria below:

1. An obligation exists at the reporting date.
2. There must be a probable payment (greater than 50%)
3. We can measure the amount required to settle the obligation.

Question 4

What are the two types of obligation?

Answer 4

They can be legal or constructive.

Constructive means there is no realistic alternative but to settle the obligation.

Question 5

Can we recognise a provision for operating losses?

Answer 5

No, as there is no obligation to continue in business. We could close down.

Question 6

Can we recognise a provision for an onerous contract?

We have a contract with a customer that is loss-making.

Answer 6

Yes, as we have a contractual obligation. There is a probable payment and we can determine the cost.

Question 7

Can we make a provision for warranty costs?

We sell products under warranty.

Answer 7

Yes as we have a legal obligation to repair faulty goods.

Question 8

Can we make a provision for environmental contamination?

Answer 8

If there is a legal requirement to clean up. Yes

If there is no legal requirement, examine as we need to consider if we have a constructive obligation.

Question 9

Can we recognise a provision for repair costs? It’s our own asset.

Answer 9

No as there is no obligation to repair your assets, we could replace.

Question 10

If you rent an asset from the owner and the lease stipulates that you need to repair any damage during the lease term. Can you recognise a provision for repairs?

Answer 10

Yes a provision is required.
It’s a lease and a legal obligation.

Question 11

Can we make a provision for training costs?

Answer 11

No as there is no obligation to train or retrain. We could hire new staff.

Question 12

Can we recognise provision for decommissioning costs? Dismantling costs that we agree to.

Answer 12

Yes as there is an obligation, a probable payment and an estimate of the costs.

If its a future payment we need to discount to present value.

Also the cost of dismantling is direct, necessary and efficient add to the cost of the asset on the SOFP

Debit PPE
Credit Provision

Question 13

Can we make a provision for restructuring costs?

Answer 13

It depends. There must be an obligation. It will be a constructive obligation.

There are two conditions to make a provision.

1. There must be a formal plan approved by the board
2. An announcement of the plan was made to the parties affected by it.

Question 14

What type of restructuring costs can be provided for?

Answer 14

Make a provision for the direct costs

1. Redundancy costs
2. Legal fees

Do not provide for retraining, operating losses, or impairment of assets (reduction in asset value)

Do provide for onerous contracts

Question 15

What about reimbursement from 3rd party recognition?

Answer 15

We can only recognise a reimbursement if its VIRTUALLY CERTAIN. ie Insurance.

We have to show it as a separate asset - we can’t offset the provision liability

Question 16

What is a contingent asset?

Answer 16

It is an asset that is contingent, meaning its possible but dependent on uncertain future events

Question 17

What is a contingent liability?

Answer 17

It is a liability that is contingent, its possible but dependent upon uncertain future events.

Question 18

How do we treat contingent assets and liabilities in the financial statements?

Answer 18

We CANNOT recognise a contingent asset or liability in the accounts of an individual company

Question 19

Do we disclose a contingent asset?

Answer 19

Yes we disclose a contingent asset if its probable (greater that 50%)

We disclose it as a note in the accounts

Question 20

Do we disclose a contingent liability?

Answer 20

Yes we must disclose a contingent liability unless its chances are remote.

By remote we mean chance of 5% or less.

It’s disclosed as a note in the accounts.