Introduction and the Framework



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Related standards

  • Provisions, Contingent Liabilities and Contingent Assets
  • Related standards
  • IAS 37
  • Current GAAP comparisons
  • Looking ahead
  • End-of-chapter practice

FAS 5 Accounting for Contingencies

  • Related Standards
  • FAS 5 Accounting for Contingencies
  • FAS 143 Accounting for Asset Retirement Obligations
  • FAS 146 Accounting for Costs Associated with Exit or Disposal Activities
  • CON 5 Recognition and Measurement in Financial Statements of Business Enterprises
  • CON 6 Elements of Financial Statements
  • CON 7 Using Cash Flow Information and Present Value in Accounting Measurements
  • Related Standards
  • Framework for the Preparation and Presentation of Financial Statements
  • IFRS 4 Insurance Contracts
  • IAS 1 Presentation of Financial Statements
  • IAS 11 Construction Contracts
  • IAS 12 Income Taxes
  • IAS 17 Leases
  • IAS 19 Employee Benefits

Objective and scope

  • IAS 37 – Overview
  • Objective and scope
  • Recognition
  • Measurement
  • Reimbursements
  • Changes in and use of provisions
  • Application of the recognition and measurement rules
  • Disclosures

Standard seeks to ensure that provisions and contingencies are appropriately dealt with in terms of recognition, measurement, and disclosure

  • Standard seeks to ensure that provisions and contingencies are appropriately dealt with in terms of recognition, measurement, and disclosure
  • It does not cover:
    • Executory contracts unless they are onerous
    • Provisions or contingencies that are covered by other standards
    • Depreciation and impairments
  • The key thing that separates a provision from other liabilities is the uncertainty associated with it, including:
    • • Uncertainty of the timing of a future expenditure, and/or
    • • Uncertainty of measurement

The standard defines provisions, contingent liabilities, and contingent assets as follows:

  • IAS 37 – Objective and Scope
  • The standard defines provisions, contingent liabilities, and contingent assets as follows:
  • A provision is a liability of uncertain timing or amount
  • A contingent liability is
  • (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 recognized 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
  • A contingent asset is 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

How are provisions differentiated from contingencies?

  • IAS 37 – Objective and Scope
  • How are provisions differentiated from contingencies?
  • Both have significant uncertainty associated with them, although contingencies have considerably more - relating either to the outcome of a future event or the measurement of the element
  • The terms contingent assets/liabilities are used to refer to assets/liabilities that are not recognized in the financial statements because of significant uncertainty
  • Provisions, by contrast, are recognized. They reflect an existing obligation that is measurable and probable

PROVISIONS:

  • IAS 37 – Recognition
  • PROVISIONS:
  • Provisions are recognized only when all of the following criteria are met:
  • (a) An entity has a present obligation (legal or constructive) as a result of a past event
  • (b) It is probable 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
  • The above definition is essentially the definition of a liability, including
  • recognition criteria

Present Obligation Resulting from a Past Event, Which Is Independent of

  • IAS 37 – Recognition
  • Present Obligation Resulting from a Past Event, Which Is Independent of
  • an Entity’s Future Actions
  • To determine whether we should recognize a liability or not depends on whether an obligation exists at the present time
  • This is differentiated from a future commitment, although the latter may create a present obligation if there are significant negative consequences
  • The obligation must also result from a past event (sometimes referred to as an obligating event) and according to IAS 37.17, there is no realistic alternative to settling the obligation (there is little or no discretion to avoid settlement)
  • The standard notes that this would be the case, for instance:
    • • Where the obligation is enforceable by law (known as a legal obligation), or
    • • Where a valid expectation has been created that the entity will discharge the
    • obligation (known as a constructive obligation)


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