IAS 37

PROVISIONS, CONTINGENT
LIABILITIES & CONTINGENT
ASSETS [IAS 37]
LECTURE MATERIAL
Prepared by BIANCA NEL CA (SA)
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• The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons
from registering as chartered accountants (SA), as such actions constitute a gross transgression of
ethical principles, which is a violation of the code of professional conduct of SAICA
• South African Police Service
• Any other relevant professional body / organisation, including any employer
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CONTENT
SAICA'S PRINCIPLES OF EXAMINATION

The concepts and topics of IAS 37 is at a core level

NB! TYPE OF LIABILITIES (IAS 37)

1. Outright liability Example: Bond agreement to buy property:
N = 20 years, interest rate = fixed, payment = sort
2. Provisions [IAS 37]
of fixed (might fluctuate with interest rate) = Is
3. Contingent liabilities [IAS 37] this a provision? UNCERTAINTY T/A? NO = We
know the period, we know the interest rate = we
know we have to pay a certain amount
=> NOT A PROVISION = normal LIABILITY
[outright liability]

Questions to expect:
• Discussions
• Journals
• Disclosure & Presentation
• Remember IAS 12

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REVISION
1. PROVISION 2. CONTINGENT LIABILITIES 3. CONTINGENT ASSETS
WHAT IS? • Possible Obligation • Possible Asset
A liability of uncertain • Present Obligation = • It’s existence will be
timing or amount Outflow possible (not confirmed by one or
A present obligation from a probable) OR more uncertain events
past event = obligation to not reliably measurable • Not recognised
transfer resource
Creates - Legal/Constructive
Obligation
WHEN RECOGNISE? REIMBURSEMENTS ONEROUS CONTRACT
1. Present obligation • recognised when, and Unavoidable costs of
2. Outflow of FEB only when, it is virtually meeting obligations under
3. Reliable measured certain that the contract > Economic
reimbursement will be benefits of the contract
HOW MEASURED? received if the entity
Unavoidable Costs = LOWER
Best estimate. settles the obligation
of cost of fulfilling the
• Treated as a separate contract and the penalties
FUTURE OPERATING LOSSES asset from failing to fulfil it
• Do not meet def of • Amount recognised for
liability the reimbursement shall Present obligation of
• No provision not exceed the amount of contract = PROVISION
Indication of Impairment the provision

RESTRUCTURING DISCLOSURE IFRIC 5

Provision for restructuring 1. All classes of provisions • Rights to Interest arising
costs is recognised ONLY 2. Contingent Liabilities from Decommissioning,
when the general 3. Contingent Assets Restoration and
recognition criteria for Environmental
provisions are met Rehabilitation Funds
A constructive obligation to
• Consensus
restructure arises ONLY
➢ Accounting for
when an entity
✓ Has detailed formal interest in a fund
plan for restructuring ➢ Accounting for
obligations to make
✓ Has raised valid
additional
expectation in those
affected that it will carry contributions
out restructuring NOT REQUIRED:
FAC 4861
LINK WITH IAS 19 TB

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REIMBURSEMENTS (IAS 37.53)

WHAT IS A REIMBURSEMENT?

Where some or all of the expenditure required to settle a provision is expected to be

reimbursed by another party.

XYZ Ltd Entity raise provision: The R100k will be reimburse by another entity
Dr. Expense R100k [ABC Ltd]: Records of XYZ Ltd:
Cr. Provision R100k Dr. Bank R100k
Cr. Expense R100K

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 IAS 37
PROVISIONS, CONTINGENT
LIABILITIES & CONTINGENT
ASSETS
LECTURE EXAMPLES
Prepared by BIANCA NEL CA (SA)
COPYRIGHT NOTICE

Copyright © CA Campus

These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of
1978, no part of this material may be reprinted or reproduced, in any form whatsoever, either in
whole or in part or by any electronic or other means including the making of photocopies thereof,
without the express prior written consent of the proprietor, CA Campus.

No individual may share any CA Campus content or material with any other person.

The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and
to report their details to:
• UNISA
• The South African Institute of Chartered Accountants (SAICA) for purposes of barring such
persons from registering as chartered accountants (SA), as such actions constitute a gross
transgression of ethical principles, which is a violation of the code of professional conduct of
SAICA
• South African Police Service
• Any other relevant professional body / organisation, including any employer
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EXAMPLE 1

Carpediem Ltd is a farming company in the Northern Province. Carpediem Ltd farms cattle and grows
maize. On 25 February 20.18, the Limpopo River burst its banks. Carpediem Ltd suffered
considerable damage due to the floods. The maize-fields were completely flooded, as a result of
which the entire maize crop was lost, and 100 head of cattle were seriously injured by the flood.

The cattle are not insured, but Carpediem insured its maize crop. Carpediem Ltd insured its maize
crop as follows:

 R2 million in the case of high-grade maize;

 R1 600 000 in the case of medium-grade maize; and
 R1 000 000 in the case of low-grade maize.

On 15 March 20.18, the assessor visited the farm in order to determine the quality (high / medium /
low grade) of the destroyed maize. The findings of the assessor will only be available to Carpediem
Ltd on 15 May 20.18. Carpediem Ltd however approached an esteemed farmer in the district as well
as the local agricultural co-operative for advice. Both of them are of the opinion that the maize was
of a medium grade.

Carpediem Ltd called in the local veterinarian on 25 February 20.18 to treat the injured cattle. The
veterinarian visited the farm daily for a period of 10 days to monitor the condition of the injured
cattle. Despite of the attempts of the veterinarian, 44 of the cattle died on 5 March 20.18 due to
shock.

The cost price of the cattle is R5 000 per head and the market value of the cattle was assessed at
R7 500 per animal. Cattle are recognised at cost in the financial statements.

The veterinarian sent an account of R50 000 at the end of March 20.18 to Carpediem Ltd.

The financial reporting date of Carpediem Ltd is 28 February 20.18. The annual financial statements
of Carpediem Ltd were authorised for issue on 30 April 20.18.

REQUIRED:
Discuss the correct accounting recognition and measurement of the above events in the annual
financial statements of Carpediem Ltd for the reporting period ended 28 February 20.18.

NB: Presentation and disclosure requirements need not be addressed.

SOURCE: UJ 2018 Question bank 3

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SOLUTION EXAMPLE 1

Can the insurance claim be recognised on 28 February 20.18?

Carpediem Ltd has already paid the insurance premiums, and can recognise the claim on the date on
which the flood destroyed the harvest, (the past entitling event) on condition that:
❑ the claim is probable,
❑ the amount can be estimated reliably, and
❑ it is virtually certain that the amount will be paid (i.e. no longer a contingent asset).

The payment will only be virtually certain when the findings of the assessor are available
(15 May 20.18).

The claim is therefore a contingent asset and is to be disclosed as a contingent asset as the possibility
of receiving the claim is not remote (but not virtually certain).

Can the cost of the harvest be expensed?

Because the insurance claim was acknowledged and the harvest destroyed, all costs must be
expensed. This is due to the inventory having no further future expected economic benefits and the
costs are therefore now recognised as expenses (asset is derecognised as it is subject to impairment).

Can the value of the cattle that died, be expensed at reporting date?

The cattle died after reporting date, therefore it is an event after the reporting date. [IAS 10]

The death of the 44 head of cattle on 5 March 20.18 represents an adjusting event after the reporting
date as it provides additional information about a condition (injured cattle with doubtful prognosis)
that already existed at the reporting date (the cattle had already been injured at reporting date).

The financial statements should therefore be remeasured as follows on 28 February 20.18:

Dr Loss of cattle (expenditure) (P/L) 220 000

Cr Cattle inventory (F/P) 220 000

Can the expenditure of the veterinarian be provided at reporting date?

The veterinarian only provided a part of his service before reporting date (namely 5 days).

A liability and expenditure can thus only be provided for R25 000 (5/10 x R50 000) as there is only a
present obligation at reporting date for services rendered. The company cannot avoid these costs in
respect of services already rendered by ceasing future activities (IAS 37.19 – avoidance test).

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EXAMPLE 2

ONEROUS CONTRACT
A Ltd signed an operating lease agreement for their factory building in Sandton, on 1 January 2009
until 31 December 2011 (i.e. 3 years), at R80 000 p.m.
On 31 December 2009, A Ltd moves their activities to Pretoria and vacates the Sandton factory
building
The operating lease cannot be cancelled by A Ltd
A Ltd sublease the factory building to B Ltd for the remainder of the 3-year lease term, at R60 000
p.m., as from 1 January 2010
An appropriate discount rate for similar transactions is 10% p.a., nominal and pre-tax.

REQUIRED: Prepare the journal entries for 2009 to 2011 in respect of the abovementioned onerous
contract ONLY

SOLUTION EXAMPLE 2

The operating lease agreement becomes onerous on 31 December 2009 when A Ltd realises that the
costs to honour the lease exceed the benefits to be derived from the lease
I.e. R80 000 p.m. > R60 000 p.m.
Monthly shortfall is R20 000 (R80k – R60k)
2 years remain (2010 to 2011) = 24 months
The discount rate is 10% p.a. (given)

Journal entries: 2009

IAS 37: Provide the PV of the least net cost of exiting, i.e. the PV of R20 000
FV = 0
I/Yr = 10% (or 10%/12 on Sharp calc’s)
N=12 x 2 = 24
P/Yr = 12 (for HP calc’s)
Pmt = R20 000
PV = R433 417 PROVIDE AT END OF 2009

Dr Operating lease expense (P/L) 433 417

Cr Provision for onerous contract (F/P) 433 417

Journal entries: 2010

• Dr Interest expense (P/L) 34 073
• Cr Provision for onerous contract (F/P) 34 073
(recognise interest on onerous contract)

Journal entries: 2011

• Dr Interest expense (P/L) 12 510
• Cr Provision for onerous contract (F/P) 12 510
(recognise interest on onerous contract)

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SHARP CALCULATION DETAILS:

To get to the R433 417

I included the following:
PMT = R80 000 - R60 000 = R20 000
Period, N = 2 x 12 = 24
Rate, i = 10/12 = 0.83
Therefore PV = R433 417
See below the excel calculations: total interest for 2010 should be R33 929 and 2011 should be R12 441
I manually calculated the interest per year, by including the following:
1 Amort = capital = 16 388
Press amort again = interest = 3 611
2 Amort = capital = 16 525
Press amort again = interest = 3 475

Continue with the above for 24 months: add all the interest for the first 12 months to obtain the total of R34
073 and the same with the remaining 12 months = R12 510
You will identify there is a slight difference with the excel amounts.
For example, interest for the first period in excel is the R3 597 and my calculator got R3 611
Immaterial difference at the end.

PMT Interest Capital Balance

433,417
1 20,000 3,597.36 16,402.64 417,014.36
2 20,000 3,461.22 16,538.78 400,475.58
3 20,000 3,323.95 16,676.05 383,799.53
4 20,000 3,185.54 16,814.46 366,985.06
5 20,000 3,045.98 16,954.02 350,031.04
6 20,000 2,905.26 17,094.74 332,936.30
7 20,000 2,763.37 17,236.63 315,699.67
8 20,000 2,620.31 17,379.69 298,319.98
9 20,000 2,476.06 17,523.94 280,796.03
10 20,000 2,330.61 17,669.39 263,126.64
11 20,000 2,183.95 17,816.05 245,310.59
12 20,000 2,036.08 17,963.92 227,346.67 33,929.67
13 20,000 1,886.98 18,113.02 209,233.65
14 20,000 1,736.64 18,263.36 190,970.28
15 20,000 1,585.05 18,414.95 172,555.34
16 20,000 1,432.21 18,567.79 153,987.55
17 20,000 1,278.10 18,721.90 135,265.64
18 20,000 1,122.70 18,877.30 116,388.35
19 20,000 966.02 19,033.98 97,354.37
20 20,000 808.04 19,191.96 78,162.41
21 20,000 648.75 19,351.25 58,811.16
22 20,000 488.13 19,511.87 39,299.29
23 20,000 326.18 19,673.82 19,625.48
24 20,000 162.89 19,837.11 (211.63) 12,441.70

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