IAS 37 -

PROVISIONS,
CONTINGENT
LIABILITIES AND
CONTINGENT
ASSETS
Group 2
IAS 37 - PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

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TABLE OF CONTENTS
1 Definition
2 Distinguishing Concepts
3 Impact on Accounting Treatment
4 Basis for Acounting Differences
5 Measurement of Provision

6 Typical Accounting Scenarios for Provision: Journal entries

7 Disclosure Requirements in Financial Statement Notes
8 Alignment with Conceptual Framework Requirements
9 Comparison
 1
DEFINITION
Provision is a liability of uncertain timing or amount

Liability: + Present obligation as a result of past events

+ Settlement iss expected to result in an outflow of resources (payment)

e.g. Aston Ltd has a policy of cleaning up any environmental

contamination caused by its operations, but is not legally obliged
to do so.
 1
DEFINITION
Provision is a liability of uncertain timing or amount

Liability: + Present obligation as a result of past events

+ Settlement iss expected to result in an outflow of resources (payment)

Contingent Liability:
A possible obligation depending on whether some uncertain
future event occurs
A present obligation but payment is not probable or the amount
cannot be measured reliably
Contingent Asset:
A possible asset that arises from past events
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
DISTINGUISHING CONCEPTS

Account Payable:
Liabilities to pay for goods or services that have been
received or supplied and have been invoiced or formally
agreed with supplier
IAS 37.11

Provision for pension :

When an employee has rendered service during a period, the entity shall
recognize the contribution payable to a defined contribution plan in exchange for
that service as a liability after deducting any contribution already paid.
If the contribution already paid exceeds the contribution due for service before the
end of the reporting period, an entity shall recognize that excess as an asset to the
extent that the prepayment will lead to
IAS 19.51
DISTINGUISHING CONCEPTS

Warranty liabilities
A liability account in which a company records the
amount of the repair or replacement cost that it expects to
incur for products already shipped or services already
provided.

Allowance for Uncollectible Accounts:

An accounting technique used to estimate and record the amount
that a company may not be able to collect from its customers
DISTINGUISHING CONCEPTS
Contingent Liability:
A possible obligation depending on whether some
uncertain future event occurs
A present obligation but payment is not probable or the
amount cannot be measured reliably

Contingent Asset:
A possible asset that arises from past events
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
 IMPACT ON ACCOUNTING
TREATMENT

Recognition Measurement Disclosure

The recognition of
Determines its Ensure that the
financial instruments
subsequent financial statements
are initially
recognized when an measurement, provide a true and
entity becomes a typically at fair view of the
party to the amortized cost or company’s
contractual fair value financial
provisions of the position
instrument
BASIS FOR ACCOUNTING
DIFFERENCES (USING
FRAMEWORKS)
How are differences rooted in the conceptual
frameworks, where principles of reliability,
neutrality, and faithful representation guide
accounting treatments?
 Faithful
Reliability Neutrality (Framework 2.16)
representation
The Conceptual This principle is supported by applying Financial information must
Framework is applicable prudence. Prudence is the exercise of not only represent relevant
to a range of accounting caution when making judgements under phenomena, but it must also
models and provides conditions of certainly. It ensures that faithfully represent the
guidance on preparing the financial statements represent the substance of the phenomena
and presenting the actual state of an organization, without that it purports to represent.
financial statement trying to amplify its results In many circumstances, the
constructed under the unnecessarily or make them look worse. substance of an economic
chosen model. It It means that assets and income are not phenomenon and its legal
emphasized that financial overstated and liabilities and expenses form are the same. If they
statements should be are not understated. Equally, the are not the same, providing
prepared in a true and exercise of prudence does not allow for information only about the
fair view. the understatement of assets or income legal form would not
or the overstatement of liabilities or faithfully represent the
expenses. economic phenomenon.
IAS 37 - PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

MEASURE OF PROVISION

The amount recognised as a provision should be the best

estimate of the expenditure required to settle the present
obligation at the balance sheet date, that is, the amount that
an entity would rationally pay to settle the obligation at the
balance sheet date or to transfer it to a third party. [IAS
37.36]
 MEASURE OF PROVISION
a For recurring events

Uncertainties in respect of the amount to be recognised

as a provision can be dealt with in different ways based
on the circumstances.
Provisions for large populations of events (e.g.
warranties, customer refunds) are measured at a
probability-weighted expected value. [IAS 37.39].
 MEASURE OF PROVISION
a For recurring events
Question: Company E sells goods with warranty. All customers are covered for the
cost of all repairs for a period of 12 months from the date of purchase. In the financial
year ended 31 December 20X0, E estimates:
• If minor defects were detected in all products sold, repair costs would be $4m
• If major defects were detected in all products sold, repair costs would be $10m
Based on historical returns records E expects that:
No defects Minor defects Major defects
85% 10% 5%

E applies these percentages to the products sold in 20X0 to calculate the

expected value of the costs of repairs. E recognises a provision in the year ended
31 December 20X0 based on this calculation?
Answer: E recognises a provision in the year ended 31 December 20X0 based on this
calculation:

(85% x 0) + (10% x $4m) + (5% x $10m) = $900,000

Explain: $900,000 is “expected value” which Company E has

estimated for warranty’s money when an obligating event occurs (sale
of product with a warranty and probable warranty claims will be
made). Where the provision being measured involves a large
population of items, the obligation is estimated by weighting all
possible outcomes by their associated probabilities. [IAS 37.39]
 MEASURE OF PROVISION
b For one - off events
Provisions for one-off events (e.g. court case) are measured at the
most likely amount. [IAS 37.40]
However, even in such a case, other possible outcomes should be
considered.

Example: If an entity has to rectify a serious fault in a major

plant that it has constructed for a customer, the individual most
likely outcome may be for the repair to succeed at the first
attempt at a cost of £1m but a provision for a larger amount
is made if there is a significant chance that further attempts will
be necessary [IAS37.40].
 MEASURE OF PROVISION
b For one - off events

Question: Rey Co has received legal advice that the most likely outcome
of the court case from the employee is that they will lose the case and have
to pay $10m. The legal team thinks there is a 60% chance of this. They
believe there is a 10% chance of having to pay $12m, and a 30% chance of
paying $2m.
In this case, how much Rey Co would provide for the most likely
outcome?
Answer: In this case, Rey Co would provide $10m, being the
most likely outcome.
 MEASURE OF PROVISION
b For one - off events
Question: Rey Co has received legal advice that the most likely outcome
of the court case from the employee is that they will lose the case and have
to pay $10m. The legal team think there is an 60% chance of this. They
believe there is a 10% chance of having to pay $12m, and a 30% chance of
paying $2m.
However, the other outcomes should also be considered, even though they are
all higher than the most likely outcome. Therefore, the best estimate used
for the provision should be weighted and is higher than the most likely
amount.
Management determines that using a weighted average is a reasonable
method to calculate the estimate and recognises a provision is:

(60% x $10m) + (10% x $12m) + (30% x $2m) = $7,8m

 MEASURE OF PROVISION
c Could you provide a rationalization for the approach to ensure its
reasonableness?
 One-off events
Special and occasional risks are often better handled with a focus on this approach.
Determining specifically what probability is best for a partial event will minimize and anticipate
future economic losses.

 Recurring events
When an event is repeatable without contingency, accounting for it as part of recurrent costs can
increase long-term predictability.
If the event occurs frequently and has cyclical characteristics, calculating it as a regular cost can
help standardize provisions and manage resources and costs.
TYPICAL ACCOUNTING
SCENARIOS FOR
PROVISION:
JOURNAL ENTRIES
Provide examples of common accounting situations
related to provisions
CONDITIONS FOR RECORDING JOURNAL
ENTRIES:

1 A provision is only recognized when the following

conditions are met
The entity has a present obligation (legal or constructive) as
2 a result of a past event

3 A decrease in economic benefits is likely (more likely than

not) resulting in the entity having to use resources with
economic benefits to pay the liability there.
4 The entity can provide a reliable estimate of the value of the
liability
 ACCOUNTING ENTRIES RECORDED
 Initial measurement:
When the enterprise makes provisions:
Debit: Expenses
Credits: Provisions payable (Provisions)

 Subsequent measurement:
If during the period, the enterprise makes additional
provisions:
Debit: Expenses
Credits: Provisions payable (Provisions)

If during the period, the enterprise reduces the provision

because it has paid expenses related to that provision:
Debit: Provisions payable (Provisions)
Credits: Expenses
Some typical accounting scenarios for provisions
and the corresponding examples:

Provision for Bad Debts

Question:
5% Provision for bad debts is to be maintained against the bad debts on debtors
amounting to ₹50,000. Record the necessary journal entry.
Solution:
Some typical accounting scenarios for provisions
and the corresponding examples:

Provision for Income Tax

Question:
Provision for income tax is to be maintained for ₹20,000. Record the necessary journal
entry.
Solution:
Some typical accounting scenarios for provisions
and the corresponding examples:

Provision for Depreciation

Question:
Provision for depreciation is to be maintained amounting to ₹8,000. Record the
necessary journal entry.
Solution:
Some typical accounting scenarios for provisions
and the corresponding examples:

Provision for Repairs and Maintenance

Question:
Provision for repairs and maintenance is to be maintained amounting to ₹4,000. Record
the necessary journal entry
Solution:
 DISCLOSURE
REQUIREMENTS IN
FINANCIAL
STATEMENT NOTES
DISCLOSURE REQUIREMENTS IN
FINANCIAL STATEMENT NOTES
PROVISION
CONTINGENT LIABILITIES/ASSETS
 PROVISION
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 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.
[IAS37.84]
 PROVISION
An entity shall 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.

• The amount of any expected reimbursement,

stating the amount of any asset that has been
recognised for that expected reimbursement.
[IAS37.85]
 CONTINGENT ASSETS/LIABILITIES
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,
measured using the principles set out for provisions. [IAS37.89]

It is important that disclosures for contingent assets

avoid giving misleading indications of the likelihood of
income arising. [IAS37.90]
In extremely rare circumstances, the disclosure of some or all of
the information required by IAS 37 could materially affect the
entity's position in a dispute with other parties about the
substance of its contingent liabilities potential or contingent
assets. [IAS 37.92]
 33

ALIGNMENT WITH
CONCEPTUAL FRAMEWORK
REQUIREMENTS
Assess how disclosures align with the conceptual framework’s
principles of relevance and faithful representation.
 ALIGNMENT WITH CONCEPTUAL
FRAMEWORK REQUIREMENTS

The disclosures in IAS 37 are consistent with the

principles of relevance and faithful presentation of the
conceptual framework.
First, regarding relevance: provides information that
can influence the economic decisions of report users.
finance. By disclosing information about the nature,
potential impacts and uncertainties associated with
these situations, users can assess the potential risks
and opportunities that could affect their financial
position main and unit performance. Disclosure of
possible outcomes and the probability of each outcome
allows users to assess the potential financial impact
and make informed judgments.
ALIGNMENT WITH CONCEPTUAL
FRAMEWORK REQUIREMENTS

Second, on fair presentation: The requirement to

disclose information about conditional assets and
liabilities in IAS 37 is intended to provide a fair
presentation of the entity's financial position and
performance. By disclosing information about the
nature of the conditions, the likely outcomes, and the
basis of measurement used, financial statement notes
provide complete, neutral, and unbiased information.
contains errors. This helps users understand
uncertainties and the potential impact on the entity's
financial position accurately.
COMPARISON BETWEEN IFRS AND VIETNAMESE ACCOUNTING REGULATIONS
Scope Apply to the accounting treatment of provisions, contingent liabilities and
contingent assets.
Definitions Provide definitions of provisions, contingent liabilities and contingent assets,
ensuring consistency in their interpretation and application.
Recognition Require provisions to be recognized when there is a present obligation as a
result of a past event and it is probable that impairment will be required to
reduce resources to handle that obligation. Similarly, contingent liabilities are
recognized when there is a probable reduction in resources to settle a possible
obligation.
Measurement Require provisions and contingent liabilities to be measured at the best estimate
of the cost required to settle the obligation.
Allow the use of discounted cash flow techniques when the timing of cash
outflows is uncertain.
Disclosure Both standards require disclosure of information relating to provisions,
contingent liabilities and contingent assets in the financial statements. This
includes the nature of the obligation, the uncertainties surrounding it and the
carrying amount of the provision or contingent liability.
 DIFFERENCES 37

IAS 37 VAS 18
Provides that this standard does not Not mentioned
apply to executory contracts unless
these contracts involve significant
risks.
Explains that when provisions are used No specified
to adjust the carrying value of assets
Provides that in cases where it is VAS 18 for such an event are based on
unclear whether a present obligation a “certainty” threshold which may be a
exists different threshold than “more likely
than not” under IAS 37
require an enterprise to conduct requires businesses to conduct
impairment testing for assets that are impairment testing for assets that are
expected to suffer future operating expected to suffer losses when
losses or that are specifically servicing operating in the future or that specialize
high-risk contracts. in serving contracts with high risks.
 EXPLAIN REASONS FOR
NOTED DIFFERENCES

- Attributed to various factors, including differences in legal

and regulatory frameworks, cultural and economic contexts,
and the specific needs of the respective jurisdictions.
- Accounting standards are often influenced by local laws,
practices, and the preferences of standard-setting bodies in
each country.
Assess The Impact On Information Quality For
Investors. Specify Potential Overestimations
Or Underestimations On Financial Statements
Due To These Differences.
The impact on information quality for investors can be
significant due to these differences. Potential overestimations or
underestimations on financial statements may arise as a result .

Investors rely on accurate and comparable financial

information to make informed decisions.
This can lead to inconsistencies in reporting and
potentially misinterpretation of an entity’s financial
position.
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