IAS 37 Provisions, Contingent Liabilities and Contingent Assets

This Standard is effective for financial statementscovering periods beginning on or after 1 July 1999.

Introduction


1   IAS 37 prescribes theaccounting and disclosure for all provisions, contingent liabilities andcontingent assets, except:
(a) those resulting from financialinstruments that are carried at fair value;
(b) those resulting from executorycontracts, except where the contract is onerous. Executory contracts arecontracts under which neither party has performed any of its obligations orboth parties have partially performed their obligations to an equal extent;
(c) those arising in insurance enterprisesfrom contracts with policyholders; or
(d) those covered by another InternationalAccounting Standard.

Provisions


2   The Standard definesprovisions as liabilities of uncertain timing or amount. A provision should berecognised when, and only when:
(a) an enterprise has a present obligation(legal or constructive) as a result of a past event;
(b) it is probable (i.e. more likely thannot) that an outflow of resources embodying economic benefits will be requiredto settle the obligation; and
(c) a reliable estimate can be made of theamount of the obligation. The Standard notes that it is only in extremely rarecases that a reliable estimate will not be possible.
3   The Standard defines aconstructive obligation as an obligation that derives from an enterprise'sactions where:
(a) by an established pattern of pastpractice, published policies or a sufficiently specific current statement, theenterprise has indicated to other parties that it will accept certainresponsibilities; and
(b) as a result, the enterprise has createda valid expectation on the part of those other parties that it will dischargethose responsibilities.
4   In rare cases, forexample in a law suit, it may not be clear whether an enterprise has a presentobligation. In these cases, a past event is deemed to give rise to a presentobligation if, taking account of all available evidence, it is more likely thannot that a present obligation exists at the balance sheet date. An enterpriserecognises a provision for that present obligation if the other recognitioncriteria described above are met. If it is more likely than not that no presentobligation exists, the enterprise discloses a contingent liability, unless thepossibility of an outflow of resources embodying economic benefits is remote.
5   The amount recognised asa provision should be the best estimate of the expenditure required to settlethe present obligation at the balance sheet date, in other words, the amountthat an enterprise would rationally pay to settle the obligation at the balancesheet date or to transfer it to a third party at that time.
6   The Standard requiresthat an enterprise should, in measuring a provision:
(a) take risks and uncertainties intoaccount. However, uncertainty does not justify the creation of excessiveprovisions or a deliberate overstatement of liabilities;
(b) discount the provisions, where theeffect 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 ofmoney and those risks specific to the liability that have not been reflected inthe best estimate of the expenditure. Where discounting is used, the increasein the provision due to the passage of time is recognised as an interestexpense;
(c) take future events, such as changes inthe law and technological changes, into account where there is sufficientobjective evidence that they will occur; and
(d) not take gains from the expecteddisposal of assets into account, even if the expected disposal is closelylinked to the event giving rise to the provision.
7   An enterprise may expectreimbursement of some or all of the expenditure required to settle a provision(for example, through insurance contracts, indemnity clauses or suppliers'warranties). An enterprise should:
(a) recognise a reimbursement when, and onlywhen, it is virtually certain that reimbursement will be received if theenterprise settles the obligation. The amount recognised for the reimbursementshould not exceed the amount of the provision; and
(b) recognise the reimbursement as aseparate asset. In the income statement, the expense relating to a provisionmay be presented net of the amount recognised for a reimbursement.
8   Provisions should bereviewed at each balance sheet date and adjusted to reflect the current bestestimate. If it is no longer probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation, the provisionshould be reversed.

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.
Editorial note: Substituted by IFRS 5 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2005, it shall disclose that fact. Previously "A provision should be used only for expenditures for which the provision was originally recognised.".
Provisions - Specific Applications
10 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.

11 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 enterprise tests these assets for impairment under IAS 36, Impairment of Assets.
12 If an enterprise 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.
13 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 enterprise; or
(b) the manner in which that business is conducted.

14 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 enterprise:
(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.

15 A management or board decision to restructure does not give rise to a constructive obligation at the balance sheet date unless the enterprise has, before the balance sheet date:
(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 enterprise will carry out the restructuring.
16 Where a restructuring involves the sale of an operation, no obligation arises for the sale until the enterprise is committed to the sale, i.e. there is a binding sale agreement.

17 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 enterprise. Thus, a restructuring provision does not include such costs as: retraining or relocating continuing staff; marketing; or investment in new systems and distribution networks.
Contingent Liabilities

18 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 enterprise; 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.
Editorial note: First paragraph substituted by improvements project standard IAS 10 with effect for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period. Previously "The Standard supersedes the parts of IAS 10, Contingencies and Events Occurring After the Balance Sheet Date, that deal with contingencies. The Standard defines a contingent liability as:"

19 An enterprise should not recognise a contingent liability. An enterprise should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
Contingent Assets
20 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 enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.
21 An enterprise should not recognise a contingent asset. A contingent asset should be disclosed where an inflow of economic benefits is probable.

22 When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
Effective Date
23 The Standard becomes operative for annual financial statements covering periods beginning on or after 1 July 1999. Earlier application is encouraged.
International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) is set out in paragraphs 1-96 and Appendices A-D. 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. These provide a basis for selecting and applying accounting policies in the absence of explicit guidance.

Objective
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 the financial statements to enable users to understand their nature, timing and amount.
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;
(b) [...]
(c) those covered by another Standard.
Editorial note: Amended by improvements project standard IAS 39 with effect for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period. Previously "This Standard should be applied by all enterprises in accounting for 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; (c) those arising in insurance enterprises from contracts with policyholders; and (d) those covered by another International Accounting Standard."

Sub-paragraph (b) deleted by IFRS 4 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this IFRS for an earlier period, it shall disclose that fact. Previously "those arising in insurance entities from contracts with policyholders; and".