IAS 37

Provisions, Contingent Liabilities

& Contingent Assets
HATEM NOSSEIR
Group Financial Planning, Analysis & Reporting Director l Finance Director
l FP&A l XP&A l Finance Business Partner l Finance Digital Transformation l
Financial Modeling l Financial Consultant l Instructor
l CMA l DipIFR
Mob: +2 0106 501 1616 Email: [email protected]
 IAS 37 Provisions , Contingent Liabilities and Assets
Nothing Contingent Liability ( Disclourse) Provision ( +Disclourse) Definations A provision
0 - 5% 6% Possible 50% >50% Probable 100% Provision Warranties They're argued to be geniune provision as they're more likely than not to occur
Remote An transfer of resources is regarded probable ↪ Provision: A liability of uncertain timing or amount Environmental contamination. Provisions must be made if the company has an
if the event is more likely than not to occur ↪ Liability: A present obligation arising from past event that would be settled by a environmental policy or if there’s a breach of environmental legislation.
transfer of resources Decommissioning or abandonment costs. These are costs associated with the removal and
Provision Contengint liability disposal of an asset and restoring the site to its original condition at useful life ends.

Recognition Criteria A present obligation that is not probable or cannot be estimated reliably Restructuring. A programme that is planned and controlled by management, and materially
R ↪ Reliable estimate (>50% - Probable) Treatment Only disclose changes
O ↪ Obligation Present raises from Past Events Contengint asset either:
T ↪ Transfer of resources A possible asset arises from past events (a) The Scope of a business undertaken by an entity; (Ex1,2,3)or
Provisions are distinguished from other liabilities such as creditors and accruals, as for other liabilities, uncertainty about the Treatment Only disclose unless it's virtually certain (b) The Manner in which that business is conducted (Ex4).
timing and amount is much less than for provision Given examples:
1- Sale or termination of line of business ( Condition Entity have Sales agreement )
Measurement 2- Relocation or closure of business areas
The estimates will be determined by the judgement of management 3- Change in management structure
4- Fundamental reorganization that have material effect on company's nature and focus of
operations
Criteria:
Expected values Most likely Time value of money Detailed formal plan
Weighted average of all possible outcomes by their corresponding When the provision involves a single item, it is made for the most When the obligation is expected to be settled after more than one period, provision Announcement to those affected by it
probabilities likely outcome should be the present value of the expenditure and it should be unwined every Measurement : All Direct necessary cost to incur for restructuring not relating to ongoing
Example: When selling goods with warranty Volumes and Example: the outcome of a legal case, of which outcomes are as reporting period activities ( marketing , new system , new branch cost)
corresponding costs can result in provision value as follows follows Example: Environmental cleanup of value $5 m is required after 5 years, the end of Onerous contracts. 'a contract in which the unavoidable costs of meeting the obligations
Cost Of Sales Cost (,000) (,000) Value Likelihood an asset useful life, discount rate is 10% under the contract exceed the economic benefits expected to be received under it' .
75% × $0 = $0 $10,000 20% A given example, a supply contract related to a particular product that an entity can no longer
20% × $1,000 = $200 $50,000 25% Provision created = $5 m / (1.1^5) = $3,104,600 sell would be onerous. The provision should be measured at the lower of the cost of fulfilling the
5% × $4,000 = $200 $100,000 55% contract and the cost of penalties from failure to fulfil the contract.
Provision = $400 Provision = $100,000 Provision year 2 = $3,104,600 × (1 + 10%) = $3,415,050
Example: Contract for future purchase of chemical used in the production of a product before
Recognition selling the production line
- Chemicals brought = 2000 Litres
Expected value Dr. Cr. Most likely Dr. Cr. Present value Dr. Cr. - Purchase price = $150
Warranty expense $ 400,000 Legal expense $ 100,000 Asset cost $ 3,104,600 - Contract cancellation fee = $135,000
Warranty provision $ 400,000 Legal provision $ 100,000 Provision $ 3,104,600 - Selling price = $90 / Litre
- Losses from conducting contract = ($150 - $90) * 2000 = $120,000
Unwinding Dr. Cr.
Interest expense $ 310,450 In this case, a provision must be created for $120,000 (Lower value)
Provision $ 310,450 Not a provision
Major repairs Provision for major overhauls is not possible, Cannot be recognized under IAS 37
Use of provision as they represent an intention to carry out repairs, not an obligation.
Self insurance. Expected costs for events like fire damage cannot be provisioned, as no
Repairs Dr. Cr. Legal Dr. Cr. Environamental cleanup Dr. Cr. obligation exists until the event occurs.
Warranty provision $ 400,000 Legal provision $ 100,000 Provision $ 5,000,000 Future operating losses. Provisions are not recognized for future operating losses as they do
Inventory $ 100,000 Cash $ 100,000 Cash $ 5,000,000 not meet the criteria for a liability under IAS 37.
Cash $ 300,000

Reimbursement When expected to be settled or compensated by a third party: Changes in provision (Future events)
↪ Recognize only when it's virtually certain ↪ Each period provision should be revalued
↪ Reimbursement should not be greater than provision ↪ Provisions no longer probable should be derecognized
↪ Reimbursement and provision should be netted in P&L

Reimbursement Dr. Cr.

Reimbursement asset $ 100,000 HATEM NOSSEIR
Income $ 100,000 CMA, DipIFR