reporting period.

The estimates will be determined by the judgment of the

IAS □
37 : PROVISION, CONTINGENT LIABILITY AND ASSET entity's management supplemented by the experience of similar transactions.

RECOGNITION OF PROVISION Allowance is made for uncertainty where the provision being measured
✓ an entity has a present obligation, legal or constructive. involves a large population of items. The obligation is estimated by weighting
all possible outcomes by their associated probabilities, i.e. expected value.
✓ it is probable that a transfer or resources embodying economic
Where the provision involves a single item, such as the outcome of a legal
benefits will be required to settle it.
case, provision is made in full for the most likely outcome.
✓ a reliable estimate can be made of its amount.
FUTURE EVENTS
Provisions were used to profit smoothing. Profit smoothing is misleading. The Future events which are reasonably expected to occur (e.g. new legislation,
key aim of AIS 37 is to ensure that provisions are made only where there are changes in technology) may affect the amount requited to settle the entity's
valid grounds for them. Provision is a liability of uncertain timing or amount. obligation and should be considered.
Liability is a present obligation of the entity arising from past events, the REIMBURSEMENTS
Some or all of the expenditure needed to settle a provision may be expected
settlement of which is expected to result in an outflow.
to be recovered from a third party. If so, the reimbursement should be
OBJECTIVES recognized only when it is virtually certain that reimbursement will be
IAS 37 aims to ensure that appropriate recognition criteria and measurement received if the entity settles the obligation. The reimbursement should be
bases are applied to provisions, contingent liabilities and contingent assets treated as a separate asset, and the amount recognized should not be greater
than the provision itself.
and that sufficient information is disclosed in the notes to the financial
EXPECTED DISPOSAL OF ASSETS
statements to enable users to understand their nature, timing, and amount.
Gains from the expected disposal of assets should not be considered in
CONSTRUCTIVE OBLIGATION
measuring a provision.
An obligation that derives from an entity's actions where: By an established
pattern of past practice, published policies or a sufficiently specific current CHANGES IN PROVISION
statement the entity has indicated to other parties that it will accept certain Provisions should be reviewed at the end of each reporting period and
responsibilities As a result, the entity has created a valid expectation on the adjusted to reflect the current best estimate. If it is no longer probable that a
part of those other parties that it will discharge those responsibilities. transfer of resources will be required to settle the obligation, the provision
PROBABLE TRANSFER OF RESOURCES should be reversed. The provision and the amount recognized for
For the purpose of the IAS, a transfer of resources embodying economic reimbursement may be netted off in profit or loss.
benefits is regarded as 'probable' of the event is more likely than not to occur.
USE OF PROVISION
A provision should be used only for expenditures for which the provision was
This appears to indicate a probability of more than 50%. However, the
originally recognized for another purpose would conceal the impact of two
standard makes it clear that where there is a number of a similar obligation,
different events.
the probability should be based on considering the population as a whole,
FUTURE OPERATING LOSSES
rather than one single item. Provisions should not be recognized for future operating losses. They do not
RECOGNITION meet the definition of a liability and the general recognition criteria set out
The amount recognized as a provision should be the best estimate of the in the standard.
expenditure required to settle the present obligation at the end of the
Classification: Restricted
 A present obligation that arises from past events but is not recognized
ONEROUS CONTRACTS because:
An onerous contract is a contract entered into with another party under ✓ It is not probable that an outflow of resources embodying economic
which the unavoidable costs of fulfilling the terms of the contract exceed any benefits will be required to settle the obligation; or
revenues expected to be received from the goods or services supplied or ✓ The amount of the obligation cannot be measured with sufficient
reliability.
purchased directly or indirectly under the contract and where the entity
would have to compensate the other party if it did not fulfil the terms of the TREATMENT OF CONTINGENT ASSET
contract. Not recognized in the financial statements and are only disclosed in the notes
PROVISIONS FOR RESTRUCTURING if they are probable.
Restructuring is a program that is planned and is controlled by management Required Disclosures:
and materially changes one of two things: A brief description of the nature of the contingent asset
✓ The scope of a business undertaken by an entity. An estimate of its financial effect
✓ The manner in which that business is conducted. Probability of Occurrence Contingent liabilities Contingent assets
EVENTS THAT MAY FALL UNDER RESTRUCTURING Virtually certain Provide Recognize
✓ The sale or termination of a line of business. Probable Provide* Disclose in note
✓ The closure of business locations in a country or region or the Possible Disclose in notes Ignore
relocation of business activities from one country to another. Remote Ignore Ignore
✓ Changes in management structure. *if cannot be estimated, should only be disclosed
✓ Fundamental reorganizations that have a material effect on the
nature and focus of the entity‘s operation.
IAS □
10 : EVENTS AFTER THE REPORTING PERIOD
WAYS TO KNOW WHETHER THE ENTITY HAS AN OBLIGATION
✓ An entity must have a detailed formal plan for the restructuring. • Those that provide evidence of conditions that existed at the end of
✓ It must have raised a valid expectation in those affected that it will the reporting period- adjusting.
carry out the restructuring by starting to implement that plan or • Those that are indicative of conditions that arose after the reporting
announcing its main features to those affected by it. period- non-adjusting

DISCLOSURE FOR PROVISIONS EXAMPLE OF EVENTS THAT DO NOT REQUIRE ADJUSTMENTS

• Disclosure of details of the change in carrying value of a provision • Acquisition of, or disposal of, a subsidiary after the year end
from the beginning to the end of the year. • Announcement of a plan to discontinue an operation
• Disclosure of the background to the making of the provision and the • Major purchases and disposal of assets
uncertainties affecting its outcome. • Destruction of a production plant by fire after the reporting period
• Announcement or commencing implementation of a major
CONTINGENT LIABILITY restructuring
IAS 37 –Definition of Contingent Liability • Share transactions after the reporting period
A possible obligation that arises from past events and whose existence will • Litigation commenced after the reporting period
be confirmed only by the occurrence or non-occurrence of one or more • Evidence of a permanent diminution in the value of a long-term
uncertain future events not wholly within the control of the entity; or investment prior to the year end.
Classification: Restricted
 b. Unpaid taxes for current and prior periods should be recognized as a
liability and charged to profit or loss (equity) as an expense.
IAS □
12 : INCOME TAXES
Recognition of Current Tax
IMPORTANT TERMS TO REMEMBER a. Tax arising from a business combination is treated differently
Accounting profit – net profit or loss for a period before deducting b. Tax arising from a transaction or event which is recognized directly in
tax expense. equity.
Taxable profit (tax loss) –the profit (loss) for a period, determined in
accordance with the rules established by the taxation authorities, Difference between accounting and taxable income?
upon which income taxes are payable (recoverable) The difference is either TEMPORARY or PERMANENT.
Tax expense (tax income) –the aggregate amount included in the I. TEMPORARY DIFFERENCE
determination of net profit or loss for this period in respect of current • Items of income and expense which are included in both accounting
and deferred tax. and taxable income but different time periods
Current tax –the amount if income taxes payable (recoverable) in • It may either be TAXABLE or DEDUCTIBLE
respect of the taxable profit (tax loss) for the period.
Deferred tax liabilities –are the amounts of income taxes payable in ACCOUNTING INCOME TAXABLE INCOME
future periods in respect of taxable temporary difference. • Also called as Financial Income • Income for the period
Deferred tax asset –are the amount of income taxes recoverable in • Net income for the period determined in accordance with
future periods in respect of; before deducting income tax rules established by taxation
• Deductible temporary differences expense authorities which may be
• The carry forward of unused tax losses • Appearing on traditional payable or recoverable
• The carry forward of unused tax credits. Income Statement • Computed in accordance with
A. TAXABLE TEMPORARY DIFFERENCE income tax return
• Give rise to DEFERRED TAX LIABILITY • Appears on income tax return
• DEFERRED TAX LIABILTY
✓ Amount of income tax payable in future periods
Main types of Taxable Temporary Difference which are Timing Difference
✓ Accounting income is higher than taxable income
and which result in Deferred Tax Liability are:
Timing Differences
• Interest received which is accounted for accrual basis, but which for
Some temporary differences are often called Timing Differences. Income and
tax purposes included on cash basis
expense included in one accounting period but is included in taxable profit in
• Accelerated depreciation for tax purposes
different period.
• Capitalized and amortized development cost
Recognition and Measurement of Current Tax
Revalued Asset
Current tax asset and liabilities
Under IAS 16, assets may be revalued. It changes the carrying amount of asset
a. If the amount already paid to the tax authorities (e.g. Through provisional
but the tax base of asset is not adjusted. Difference between carrying amount
tax payment) exceeds the amounts due for those periods, the excess should
of revalued asset and its tax base is a temporary difference and give rise to
be recognized as an asset.
deferred tax liability or deferred tax assets.
Classification: Restricted
 • Normally recognized as income and expense and included in the net
profit or loss for the year in the statement profit or loss.
Current and Deferred Tax make up the tax charge
• Exception: where tax arises from a transaction or event which is
Deductible Temporary Difference recognized directly in equity.
• Give rise to DEFERRED TAX ASSET Components:
• DEFERRED TAX ASSET shall be recognized for all deductible 1. Deferred tax relating to timing differences
temporary difference and operating loss carryforward when it is 2. Adjustments relating to changes in the carrying amount of deferred tax
probable than that taxable income will be available against which the asset or liabilities.
deferred tax asset can be used. Revaluations will appear under the “other comprehensive income” in the
• Taxable income is higher than accounting income statement of profit or loss and other comprehensive income and tax
Permanent Difference element will be shown separately as “income tax relating to components
• Revenue and expense which are included in either accounting or of other comprehensive income”.
taxable income but WILL NEVER BE included in the other
• Nontaxable revenue and nondeductible expense Taxation in Company Accounts
• Do not give rise to deferred tax assets/liabilities Statement of Financial Position
• Liability for tax payable is the tax on current year profits.
THINGS TO REMEMBER Statement of Profit or Loss
• Tax on current year profits is adjusted for transfers to or from the
Basis of Provision of Deferred Taxes deferred tax balance and for prior year under or overprovisions.
• Entity recognizes that each timing differences at the end of the Ingredients
reporting period has an effect on future tax payments. 1. Taxation on profits
Changes in Tax Rates 2. Taxation payments due
• When corporate rate of income tax fluctuates from one year to 3. Tax on ordinary activities is calculated by aggregating:
another, a problem arises in respect of the amount of deferred tax to i. Income tax on taxable profit
be credited to the statement of profit or loss. ii. Transfers to or from deferred taxation
• Deferred tax asset and liabilities is required by IAS 12 to be measured iii. Any under provision or overprovision of income tax profits
at tax rates expected to apply in the period when the asset is realized of previous years
or liability settled.
Discounting WHY DO WE RECOGNIZE DEFERRED TAXES?
• Used to allow for the effect of the time value of money • Adjustment for deferred tax are made in accordance with the
• Deferred tax assets and liabilities should not be discounted because accruals concept and in definition of liability in Conceptual
of the complexities and difficulties involved. Framework
Carrying Amount of Deferred Assets • If future tax consequences of transactions are not recognized, profits
• Should be reviewed at the end of each reporting period. can be overstated.
Taxation in The Statement of Financial Position
Recognition Items which may expect to find:
Classification: Restricted
1. Amounts under/overprovided in the prior year
2. If there is no tax payable, there might be an income tax recoverable asset
disclosed in current assets

• There is usually a liability for tax assessed as due for the current year
• Liability on deferred taxation account.

THINGS TO REMEMBER
Presentation of Tax Asset and Liability

• Presented separately from other assets and liabilities in the SFP.

• Deferred tax asset/liabilities should not be classified as current
asset/liability, where an entity makes such distinction.
• Limited circumstances where tax asset and liability can be offset:
• Has a legally enforceable right to set of recognized amounts
• Intends to either settle on net basis or realize the asset and settle the
liability simultaneously.

Presentation of Tax Expense

• Tax expense/ income related to profit or loss for the year is presented
in statement of profit or loss.

Classification: Restricted