IAS 37 © IASCF 1823 International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets This version includes amendments resulting from IFRSs issued up to 17 January 2008. IAS 37 Provisions, Contingent Liabilities and Contingent Assets was issued by the International Accounting Standards Committee in September 1998. It replaced parts of IAS 10 Contingencies and Events Occurring After the Balance Sheet Date (issued in 1978 and reformatted in 1994) that dealt with contingencies. In April 2001 the International Accounting Standards Board (IASB) resolved that all Standards and Interpretations issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn. Since then, IAS 37 and its accompanying guidance have been amended by the following IFRSs: •IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (issued December 2003) •IAS 10 Events after the Reporting Period (issued December 2003) •IAS 16 Property, Plant and Equipment (as revised in December 2003) •IAS 39 Financial Instruments: Recognition and Measurement (as revised in December 2003) •IFRS 3 Business Combinations (issued March 2004) •IFRS 4 Insurance Contracts (issued March 2004) •IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (issued March 2004) • Amendments to IAS 39 and IFRS 4—Financial Guarantee Contracts (issued August 2005) •IAS 1 Presentation of Financial Statements (as revised in September 2007) •IFRS 3 Business Combinations (as revised in January 2008). The following Interpretations refer to IAS 37: •SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease (issued December 2001) •SIC-29 Service Concession Arrangements: Disclosures (issued December 2001 and subsequently amended) •IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (issued May 2004) •IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (issued December 2004) IAS 37 1824 © IASCF •IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment (issued September 2005) •IFRIC 12 Service Concession Arrangements (issued November 2006 and subsequently amended) •IFRIC 13 Customer Loyalty Programmes (issued June 2007) •IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (issued July 2007 and subsequently amended). IAS 37 © IASCF 1825 CONTENTS paragraphs INTRODUCTION IN1–IN23 INTERNATIONAL ACCOUNTING STANDARD 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS OBJECTIVE SCOPE 1–9 DEFINITIONS 10–13 Provisions and other liabilities 11 Relationship between provisions and contingent liabilities 12–13 RECOGNITION 14–35 Provisions 14–26 Present obligation 15–16 Past event 17–22 Probable outflow of resources embodying economic benefits 23–24 Reliable estimate of the obligation 25–26 Contingent liabilities 27–30 Contingent assets 31–35 MEASUREMENT 36–52 Best estimate 36–41 Risks and uncertainties 42–44 Present value 45–47 Future events 48–50 Expected disposal of assets 51–52 REIMBURSEMENTS 53–58 CHANGES IN PROVISIONS 59–60 USE OF PROVISIONS 61–62 APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES 63–83 Future operating losses 63–65 Onerous contracts 66–69 Restructuring 70–83 DISCLOSURE 84–92 TRANSITIONAL PROVISIONS 93 EFFECTIVE DATE 95 APPENDICES A Tables – Provisions, contingent liabilities, contingent assets and reimbursements B Decision tree C Examples: recognition D Examples: disclosures IAS 37 1826 © IASCF International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) is set out in paragraphs 1–95. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 37 should be read in the context of its objective, the Preface to International Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance . IAS 37 © IASCF 1827 Introduction IN1 IAS 37 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets, except: (a) those resulting from financial instruments that are carried at fair value; (b) those resulting from executory contracts, except where the contract is onerous. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent; (c) those arising in insurance entities from contracts with policyholders; or (d) those covered by another Standard. Provisions IN2 The Standard defines provisions as liabilities of uncertain timing or amount. A provision should be recognised when, and only when : (a) an entity has a present obligation (legal or constructive) as a result of a past event; (b) it is probable (ie more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. TheStandard notes that it is only in extremely rare cases that a reliable estimate will not be possible. IN3 The Standard defines a constructive obligation as an obligation that derives from an entity’s actions where : (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. IN4 In rare cases, for example in a law suit, it may not be clear whether an entity has a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period. An entity recognises a provision for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote. IN5 The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, in other words, the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. IAS 37 1828 © IASCF IN6 The Standard requires that an entity should, in measuring a provision: (a) take risks and uncertainties into account. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities; (b) discount the provisions, where the effect of the time value of money is material, using a pre-tax discount rate (or rates) that reflect(s) current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense ; (c) take future events, such as changes in the law and technological changes, into account where there is sufficient objective evidence that they will occur; and (d) not take gains from the expected disposal of assets into account, even if the expected disposal is closely linked to the event giving rise to the provision. IN7 An entity may expect reimbursement of some or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). An entity should: (a) recognise a reimbursement when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised for the reimbursement should not exceed the amount of the provision; and (b) recognise the reimbursement as a separate asset. In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. IN8 Provisions should be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. IN9 A provision should be used only for expenditures for which the provision was originally recognised. Provisions – specific applications IN10 The Standard explains how the general recognition and measurement requirements for provisions should be applied in three specific cases: future operating losses ; onerous contracts ; and restructurings . IN11 Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an entity tests these assets for impairment under IAS 36 Impairment of Assets. IAS 37 © IASCF 1829 IN12 If an entity has a contract that is onerous, the present obligation under the contract should be recognised and measured as a provision. An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. IN13 The Standard defines a restructuring as a programme that is planned and controlled by management, and materially changes either: (a) the scope of a business undertaken by an entity; or (b) the manner in which that business is conducted. IN14 A provision for restructuring costs is recognised only when the general recognition criteria for provisions are met. In this context, a constructive obligation to restructure arises only when an entity: (a) has a detailed formal plan for the restructuring identifying at least: (i) the business or part of a business concerned; (ii) the principal locations affected; (iii) the location, function, and approximate number of employees who will be compensated for terminating their services; (iv) the expenditures that will be undertaken; and (v) when the plan will be implemented; and (b) has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. IN15 A management or board decision to restructure does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period: (a) started to implement the restructuring plan; or (b) communicated the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring. IN16 Where a restructuring involves the sale of an operation, no obligation arises for the sale until the entity is committed to the sale, ie there is a binding sale agreement. IN17 A restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both: (a) necessarily entailed by the restructuring; and (b) not associated with the ongoing activities of the entity. Thus, a restructuring provision does not include such costs as: retraining or relocating continuing staff; marketing; or investment in new systems and distribution networks. IAS 37 1830 © IASCF Contingent liabilities IN18 The Standard defines a contingent liability as: (a) a possible obligation that arises from past events and 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; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability. IN19 An entity should not recognise a contingent liability. An entity should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets IN20 The Standard defines a contingent asset as a possible asset that arises from past events and 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. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain. IN21 An entity should not recognise a contingent asset. A contingent asset should be disclosed where an inflow of economic benefits is probable. IN22 When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. Effective date IN23 The Standard becomes operative for annual financial statements covering periods beginning on or after 1 July 1999. Earlier application is encouraged. IAS 37 © IASCF 1831 International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets Objective Scope 1 This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets, except: (a) those resulting from executory contracts, except where the contract is onerous; and (b) [deleted] (c) those covered by another Standard. 2 This Standard does not apply to financial instruments (including guarantees) that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement. 3 Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. This Standard does not apply to executory contracts unless they are onerous. 4[Deleted] 5 When another Standard deals with a specific type of provision, contingent liability or contingent asset, an entity applies that Standard instead of this Standard. For example, some types of provisions are addressed in Standards on: (a) construction contracts (see IAS 11 Construction Contracts); (b) income taxes (see IAS 12 Income Taxes); (c) leases (see IAS 17 Leases). However, as IAS 17 contains no specific requirements to deal with operating leases that have become onerous, this Standard applies to such cases; (d) employee benefits (see IAS 19 Employee Benefits); and (e) insurance contracts (see IFRS 4 Insurance Contracts). However, this Standard applies to provisions, contingent liabilities and contingent assets of an insurer, other than those arising from its contractual obligations and rights under insurance contracts within the scope of IFRS 4. The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount. IAS 37 1832 © IASCF 6 Some amounts treated as provisions may relate to the recognition of revenue, for example where an entity gives guarantees in exchange for a fee. This Standard does not address the recognition of revenue. IAS 18 Revenue identifies the circumstances in which revenue is recognised and provides practical guidance on the application of the recognition criteria. This Standard does not change the requirements of IAS 18. 7 This Standard defines provisions as liabilities of uncertain timing or amount. In some countries the term ‘provision’ is also used in the context of items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed in this Standard. 8 Other Standards specify whether expenditures are treated as assets or as expenses. These issues are not addressed in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made. 9 This Standard applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation, additional disclosures may be required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Definitions 10 The following terms are used in this Standard with the meanings specified: A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from: (a) a contract (through its explicit or implicit terms); (b) legislation; or (c) other operation of law. A constructive obligation is an obligation that derives from an entity’s actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. [...]... an entity applies this Standard for periods beginning before 1 July 1999, it shall disclose that fact 96 [Deleted] 1846 © IASCF IAS 37 IG Appendix A Tables – Provisions, contingent liabilities, contingent assets and reimbursements This appendix accompanies, but is not part of, IAS 37 Its purpose is to summarise the main requirements of the Standard Provisions and contingent liabilities Where, as a result... is disclosed together with the amount recognised for the reimbursement (paragraph 85(c)) The expected reimbursement is disclosed (paragraph 85(c)) 1848 © IASCF IAS 37 IG Appendix B Decision tree This appendix accompanies, but is not part of, IAS 37 Its purpose is to summarise the main recognition requirements of the Standard for provisions and contingent liabilities Start Present obligation as the... available evidence, it is more likely than not that a present obligation exists at the end of the reporting period (paragraph 15 of the Standard) © IASCF 1849 IAS 37 IE Appendix C Examples: recognition This appendix accompanies, but is not part of, IAS 37 All the entities in the examples have 31 December year-ends In all cases, it is assumed that a reliable estimate can be made of any outflows expected... policies that meet specified criteria The following is an example of an accounting policy that IFRS 4 permits and that also complies with the requirements in IAS 39 for financial guarantee contracts within the scope of IAS 39 © IASCF 1853 IAS 37 IE (a) At 31 December 20X0 Present obligation as a result of a past obligating event – The obligating event is the giving of the guarantee, which gives rise... takes account of the future incidence of maintenance costs, ie an amount equivalent to the expected maintenance costs is depreciated over three years © IASCF 1855 IAS 37 IE Appendix D Examples: disclosures The appendix accompanies, but is not part of, IAS 37 Two examples of the disclosures required by paragraph 85 are provided below Example 1 Warranties A manufacturer gives warranties at the time of sale... its main features to those affected, only after the reporting period, disclosure is required under IAS 10 Events after the Reporting Period, if the restructuring is material and non-disclosure could influence the economic decisions that users make on the basis of the financial statements © IASCF 1843 IAS 37 76 Although a constructive obligation is not created solely by a management decision, an obligation... recognised for the best estimate of the amount to settle the obligation (paragraphs 14–16) 1854 © IASCF IAS 37 IE Example 11 Repairs and maintenance Some assets require, in addition to routine maintenance, substantial expenditure every few years for major refits or refurbishment and the replacement of major components IAS 16 Property, Plant and Equipment gives guidance on allocating expenditure on an asset... the related asset is not a contingent asset and its recognition is appropriate 34 A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is probable © IASCF 1 837 IAS 37 35 Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements If it has become virtually certain that an inflow of economic... relate to the original provision are set against it Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events © IASCF 1841 IAS 37 Application of the recognition and measurement rules Future operating losses 63 Provisions shall not be recognised for future operating losses 64 Future operating losses do not meet the definition... costs is recognised only when the general recognition criteria for provisions set out in paragraph 14 are met Paragraphs 72–83 set out how the general recognition criteria apply to restructurings © IASCF IAS 37 72 A constructive obligation to restructure arises only when an entity: (a) has a detailed formal plan for the restructuring identifying at least: (i) (ii) the principal locations affected; (iii) . Examples: disclosures IAS 37 1826 © IASCF International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) is set out in. accounting policies in the absence of explicit guidance . IAS 37 © IASCF 1827 Introduction IN1 IAS 37 prescribes the accounting and disclosure for all provisions,