Provisions, Contingent Liabilities and ContingentAssets

1 IAS 37 IASCFA803 International Accounting Standard 37 provisions , Contingent Liabilities and Contingent AssetsThis version includes amendments resulting from IFRSs issued up to 31 December 37 provisions , Contingent Liabilities and Contingent Assets was issued by the InternationalAccounting Standards Committee in September 1998. It replaced parts of IAS 10 Contingencies and Events Occurring After the Balance Sheet Date (issued in 1978 and reformattedin 1994) that dealt with April 2001 the International Accounting Standards Board (IASB) resolved that allStandards and Interpretations issued under previous Constitutions continued to beapplicable unless and until they were amended or then, IAS 37 and its accompanying guidance have been amended by the followingIFRSs: 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.

2 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) Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4) (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)*effective date 1 January 2009 effective date 1 July 2009 IAS 37A804 IASCF IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and EnvironmentalRehabilitation Funds (issued December 2004) IFRIC 6 Liabilities arising from Participating in a Specific Market Waste Electrical andElectronic Equipment (issued September 2005) IFRIC 12 Service Concession Arrangements (issued November 2006 and subsequentlyamended) IFRIC 13 Customer Loyalty Programmes (issued June 2007) IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements andtheir Interaction (issued July 2007 and subsequently amended) IFRIC 15 Agreements for the Construction of Real Estate (issued July 2008).

3 **effective date 1 January 2009 IAS 37 IASCFA805 CONTENTS paragraphsINTRODUCTIONIN1 IN23 INTERNATIONAL ACCOUNTING STANDARD 37 provisions , Contingent Liabilities AND Contingent ASSETSOBJECTIVESCOPE1 9 DEFINITIONS10 13 provisions and other liabilities11 Relationship between provisions and Contingent liabilities12 13 RECOGNITION14 35 Provisions14 26 Present obligation15 16 Past event17 22 Probable outflow of resources embodying economic benefits23 24 Reliable estimate of the obligation25 26 Contingent liabilities27 30 Contingent assets31 35 MEASUREMENT36 52 Best estimate36 41 Risks and uncertainties42 44 Present value45 47 Future events48 50 Expected disposal of assets51 52 REIMBURSEMENTS53 58 CHANGES IN PROVISIONS59 60 USE OF PROVISIONS61 62 APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES63 83 Future operating losses63 65 Onerous contracts66 69 Restructuring70 83 DISCLOSURE84 92 TRANSITIONAL PROVISIONS93 EFFECTIVE DATE95 IMPLEMENTATION GUIDANCEA Tables provisions , Contingent Liabilities , Contingent assets and reimbursementsB Decision treeC Examples.

4 RecognitionD Examples: disclosuresFOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS EDITIONIAS 37A806 IASCFI nternational Accounting Standard 37 provisions , Contingent Liabilities and Contingent Assets(IAS 37) is set out in paragraphs 1 95. All the paragraphs have equal authority butretain the IASC format of the Standard when it was adopted by the IASB. IAS 37 shouldbe read in the context of its objective, the Preface to International Financial ReportingStandards and the Framework for the Preparation and Presentation of Financial 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis forselecting and applying accounting policies in the absence of explicit 37 IASCFA807 IntroductionIN1 IAS 37 prescribes the accounting and disclosure for all provisions , contingentliabilities 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 isonerous.

5 Executory contracts are contracts under which neither party hasperformed any of its obligations or both parties have partially performedtheir obligations to an equal extent; (c)those arising in insurance entities from contracts with policyholders; or(d)those covered by another Standard defines provisions as Liabilities of uncertain timing or provision should be recognised when, and only when : (a)an entity has a present obligation (legal or constructive) as a result of a pastevent;(b)it is probable (ie more likely than not) that an outflow of resourcesembodying economic benefits will be required to settle the obligation; and(c)a reliable estimate can be made of the amount of the Standard notes that it is only in extremely rare cases that a reliableestimate will not be Standard defines a constructive obligation as an obligation that derives froman entity s actions where : (a)by an established pattern of past practice, published policies or asufficiently specific current statement, the entity has indicated to otherparties that it will accept certain responsibilities; and(b)as a result, the entity has created a valid expectation on the part of thoseother parties that it will discharge those rare cases, for example in a lawsuit, it may not be clear whether an entity hasa present obligation.

6 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 than notthat a present obligation exists at the end of the reporting period. An entityrecognises a provision for that present obligation if the other recognition criteriadescribed above are met. If it is more likely than not that no present obligationexists, the entity discloses a Contingent liability, unless the possibility of anoutflow of resources embodying economic benefits is amount recognised as a provision should be the best estimate of theexpenditure required to settle the present obligation at the end of the reportingperiod, in other words, the amount that an entity would rationally pay to settlethe obligation at the end of the reporting period or to transfer it to a third partyat that 37A808 IASCFIN6 The Standard requires that an entity should, in measuring a provision: (a)take risks and uncertainties into account.

7 However, uncertainty does notjustify the creation of excessive provisions or a deliberate overstatement ofliabilities;(b)discount the provisions , where the effect of the time value of money ismaterial, using a pre-tax discount rate (or rates) that reflect(s) currentmarket assessments of the time value of money and those risks specific tothe liability that have not been reflected in the best estimate of theexpenditure. Where discounting is used, the increase in the provision dueto 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 willoccur; and(d)not take gains from the expected disposal of assets into account, even if theexpected disposal is closely linked to the event giving rise to the entity may expect reimbursement of some or all of the expenditure requiredto settle a provision (for example, through insurance contracts, indemnity clausesor suppliers warranties).

8 An entity should: (a)recognise a reimbursement when, and only when, it is virtually certainthat reimbursement will be received if the entity settles the amount recognised for the reimbursement should not exceed theamount of the provision; and(b)recognise the reimbursement as a separate asset. In the statement ofcomprehensive income, the expense relating to a provision may bepresented net of the amount recognised for a should be reviewed at the end of each reporting period and adjusted toreflect the current best estimate. If it is no longer probable that an outflow ofresources embodying economic benefits will be required to settle the obligation,the provision should be provision should be used only for expenditures for which the provision wasoriginally specific applicationsIN10 The Standard explains how the general recognition and measurementrequirements for provisions should be applied in three specific cases: futureoperating losses ; onerous contracts ; and should not be recognised for future operating losses.

9 An expectationof future operating losses is an indication that certain assets of the operation maybe impaired. In this case, an entity tests these assets for impairment underIAS 36 Impairment of Assets. IAS 37 IASCFA809IN12If an entity has a contract that is onerous, the present obligation under thecontract should be recognised and measured as a provision. An onerous contractis one in which the unavoidable costs of meeting the obligations under thecontract exceed the economic benefits expected to be received under it. IN13 The Standard defines a restructuring as a programme that is planned andcontrolled 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 provision for restructuring costs is recognised only when the generalrecognition criteria for provisions are met. In this context, a constructiveobligation 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 whowill 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 therestructuring by starting to implement that plan or announcing its mainfeatures to those affected by management or board decision to restructure does not give rise to aconstructive 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.

10 Or(b)communicated the restructuring plan to those affected by it in asufficiently specific manner to raise a valid expectation in them that theentity will carry out the a restructuring involves the sale of an operation, no obligation arises forthe sale until the entity is committed to the sale, ie there is a binding restructuring provision should include only the direct expenditures arisingfrom 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, arestructuring provision does not include such costs as: retraining orrelocating continuing staff; marketing; or investment in new systems anddistribution 37A810 IASCFC ontingent liabilitiesIN18 The Standard defines a Contingent liability as: (a)a possible obligation that arises from past events and whose existence willbe confirmed only by the occurrence or non-occurrence of one or moreuncertain future events not wholly within the control of the entity; or(b)a present obligation that arises from past events but is not recognisedbecause: (i)it is not probable that an outflow of resources embodying economicbenefits will be required to settle the obligation; or (ii)the amount of the obligation cannot be measured with sufficientreliability.