CHAPTER 35

SMEs PROVISIONS ND CONTINGENCIES

Provision a liability of uncertain timing or amount.
I.

Recognition of provision
a) The entity has an obligation at the reporting date as a result of past
event.
b) It is probable that the entity will be required to transfer economic
benefits in settlement.
c) The amount of the obligation can be estimated reliably.

II.

Comparison with full PFRS

- There is no significant differences between PFRS for SMEs and full PFRS
with respect to provisions and contingencies.
- The same principles for accounting and reporting provision and for
disclosing contingent liabilities and contingent assets.

III.

Initial measurement
- SME shall measure a provision at the best estimate of the amount
required to settle the obligation at the reporting date.
- Best estimate is the amount an entity would rationally pay to settle
the obligation at the end of reporting period or to transfer to a third
party at that time.
- If the effect of time value of money is material, the amount of provision
shall be the present value of the amount required to settle the
obligation.
- The discount rate shall be a pretax rate that reflect current market
assessment of the time value of money.
- Risk specific to the liability should be reflected either in the discount
rate or in the estimation of the amount required to settle the
obligation, but not both.
- An entity shall exclude the gain on the expected disposal of the asset
from the measurement of a provision.
- When the provision arises from a single obligation, the individual most
likely outcome maybe the best estimate of the amount required to
settle the obligation.
- When there is a continuous range of possible outcomes and each point
in the range is as likely as any other, the midpoint of the range is used.

IV.

Reimbursement
- SME shall recognize the reimbursement receivables as an asset only
when virtually certain that the entity will receive the reimbursement.
- The amount of the reimbursement shall not exceed the amount of the
provision.
- Reimbursement receivable shall be presented in the statement of
financial position as an asset and shall not be offset against the
estimated liability for the provision.
- Reimbursement may be offset against the expense relating to the
provision and only the net amount is reported in the statement of
comprehensive income.

V.

Subsequent measurement
- SME shall review provision at each reporting date and adjust them to
reflect the current best estimate of the amount that would be required
to settle the obligation.

Any adjustment to the amount of the provision shall be recognized as

profit or loss, unless the provision was originally recognized as part of
the cost of an asset.
When provision is measured at the present value of the amount
required to settle obligation, the unwinding of the discount shall be
recognized as a finance cost in the period it arises.
The difference between the face amount of the provision and the
present value is allocated as interest expense until the date
settlement.

VI.

Contingent liability is either:

a. A possible but uncertain obligation
b. A present obligation that is not recognized as a liability because it is
not probable that an outflow will occur or the amount cannot be
measured reliably.
- SME does not recognize a contingent liability as liability unless it has
been acquired in a business combination.
- Only a disclosure of a contingent liability is required.
- When the possibility of an outflow of resources is remote, no disclosure
is necessary.

VII.

Disclosure about contingent liability

An entity shall disclose for each class of contingent liability at the
reporting date:
a. A brief description of the nature of the contingent liability.
b. An estimate of the financial effect of the contingent liability.
c. An indication of the uncertainties relating to the amount of timing of
any outflow.
d. The possibility of reimbursement.

VIII.

Contingent asset a possible asset that arises from past event and
whose existence will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not wholly within
the control of the entity.
- SME shall recognized contingent asset as an asset
- Only a disclosure of a contingent asset is required when an inflow of
economic benefits is probable.
- When the inflow of future economic benefits to the entity is virtually
certain, the related asset is no longer contingent asset and its
recognition is appropriate.

IX.

Disclosure about contingent asset

If an inflow of economic benefit is probable but not virtually certain, an
entity shall disclose at the end of the reporting period:
a. Description of the nature of the contingent asset
b. An estimate without undue cost or effort of the financial effect of the
contingent asset.

X.

Prejudicial disclosure
In extremely rare cases, disclosure of some or all of the information
required can be expected to prejudice seriously the position of the entity
in a dispute with other parties on the subject matter of provision,
contingent liability and contingent asset.
In such cases, an entity need not disclose the information required but
shall disclose the following:
a. General nature of the dispute
b. Fact and reason why the information required has not been disclosed.