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2
IAS 37 - content
Provisions
• Definition
• Recognition
• Obligation
• Accounting Treatment
• Measurement
• Change in a provision
• Provision resulting in an asset
• Specific applications
▫ Future operating losses
▫ Onerous contracts
▫ Restructuring
• Disclosures
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IAS 37 - content
Contingent Liabilities
• Definition
• Accounting treatment
• Disclosures
Contingent Assets
• Definition
• Accounting treatment
• Disclosures
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Provisions - definition
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Recognition
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Obligation
LEGAL CONSTRUCTIVE
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Accounting Treatment
By recording a provision:
Dr Expenses ( P/L) xx
Cr Provision (SFP) xx
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Measurement of Provisions
SINGLE LARGE
OBLIGATION POPULATION
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Single Obligation
Example
The expenditure of a single obligation is estimated at €20,000 and
there is a 60% chance of the expenditure being incurred.
The process of estimating the amount involves two steps:
1. Is it probable there will be an outflow of economic resources?
2. Can a reliable estimate be made?
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Large Population
Example: Warranties
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Example
ABC plc sells goods which carry a one-year repair warranty. If minor
repairs were to be required for all goods sold in 2014, the cost would be
£100,000. If major repairs were to be needed for all goods sold in 2010,
the cost would be €500,000.
ABC plc estimates that 80% of goods sold in 2014 will have no defects,
15% will have minor defects and 5% will have major defects.
Requirement
Calculate the provision for repairs required at 31 December 2014
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Solution
= €40,000
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Discounting
• Where the effect of the time value of money is material, the amount of
the provision should be discounted
• i.e. it should be recorded at the present value of the expenditure
required to settle the obligation.
• The discount rate used should be the pre-tax rate that reflects current
market assessments of the time value of money and the risks specific
to the liability.
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Discounting
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Example
Requirement
1. At what amount should the provision be measured at 31 December
2014?
2. How much should be recognised as a finance charge in each of the
three years ending 31 December 2015, 2016 and 2017?
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Solution
€100,000/(1.1)³ = 75,131
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Solution
2. The finance charge in each of the three years is calculated as:
To record the finance cost, the entry at each year end is:
Dr Finance cost (P/L)
Cr Provisions (SFP)
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Future events
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Expected disposals of assets
• Gains from the expected disposal of assets should not be taken into
account in measuring a provision even if the expected disposal is closely
linked to the event giving rise to the provision.
• Instead, such gains are accounted for under the relevant IFRS
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Reimbursements
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Example
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Solution
€
Current Assets
Receivables 50,000
Current Liabilities
Provisions 50,000
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Changes in Provisions
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Use of provisions
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Recognising an asset when recognising a
provision
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Example
Requirement
How would you record the provision for environmental damage
rectification arising out of removal of the overburden?
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Solution
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Specific Applications per IAS 37
• Onerous contracts
• Restructuring
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Future operating losses
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Onerous contracts
Definition
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Onerous Contracts
Unavoidable costs
Lower of
Compensation/penalties
Costs of fulfilling the arising from failure to
contract fulfil the contract
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Onerous Contracts
Treatment
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Example
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Solution
In this case, the conditions for making a provision are met as:
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Restructuring
Definition
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Restructuring
Examples
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Restructuring
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Restructuring
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Restructuring
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Restructuring
A similar decision taken after, not before, the end of the reporting
period will normally require disclosure as a non-adjusting event after
the reporting period, under IAS 10
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Restructuring - Measurement of provision
A provision should include only the direct expenditures arising from the
restructuring, which are both:
• Necessarily entailed by the restructuring; and
• Not associated with ongoing activities.
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Examples
2. As (1) above except that the board agreed a detailed closure plan on
20 December 2014 and details were given to customers and
employees.
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Examples
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Disclosures
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Disclosures
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Note X: Provisions
£ £ £
At 1 July 2008 70,000 37,000 88,000
Additions 35,000 20,000 57,000
Amounts used during year (63,000) (32,000) (91,000)
At 30 June 2009 42,000 25,000 54,000
The warranty provision relates to estimated claims on those products sold in the
year ended 30 June 2014 which come with a one year warranty. A weighted
average method is used to provide a best estimate. It is expected that the
expenditure will be incurred in the next year.
The returns provisions relates to an open returns policy offered on all goods.
Customers are given 28 days in which to return goods and obtain a full refund.
The provision at the year end is based on a percentage, using past experience, of
the number of sales made in June 2014.
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Contingent liabilities
Definition
• 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
• A present obligation that arises from past events but is not recognised
because:
It is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
The amount of the obligation cannot be measured with sufficient
reliability.
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Accounting treatment
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Disclosures – Contingent Liabilities
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Contingent assets
Definition
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.
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Accounting treatment
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Disclosures – Contingent Assets
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Disclosures
NOTE
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Thank you!