IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Consequently, the Committee decided not to add a project on interest and penalties to its standard-setting agenda. A contingent asset refers to that type of benefit that the organization may receive but it depend on the happening or not happening of an event, hence the word contingent. The organization is not sure whether it will receive it and therefore does not record it in the financial statement directly, but only in the footnotes. On 31 December 20X8, Rey Co should record the provision at $10m/1.10, which is $9.09m.

Deposits paid in ongoing proceedings

1. Such expenditures are recognised on the same basis as if they arose independently of a restructuring.
2. In circumstances in which the containers are derecognised as part of the sale transaction, the obligation is an exchange of cash (the deposit) for the containers (non‑financial assets).
3. The Committee understood that the predominant practice today is to exclude own credit risk, which is generally viewed in practice as a risk of the entity rather than a risk specific to the liability.
4. This is where IAS 37 is used to ensure that companies report only those provisions that meet certain criteria.
5. IFRS, on the other hand, is slightly more lenient and generally permits companies to make reference to potential gains if there is at least a 50% likelihood that they will occur.

In April 2001 the International Accounting Standards Board adopted IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which had originally been issued by the International Accounting Standards Committee in September 1998. That standard replaced parts of IAS 10 Contingencies and Events Occurring after the Balance Sheet Date that was issued in 1978 and that dealt with contingencies. IFRS Sustainability Standards are developed to enhance investor-company dialogue so that investors receive decision-useful, globally comparable sustainability-related disclosures that meet their information needs. Our Standards are developed by our two standard-setting boards, the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB). Therefore, the above are some important differences between the two financial concepts.

It is widely looked in to by analysts, investors and management in order to make important financial and investment decisions, making it important to understand them clearly. Another example is the possibility of gain to an enterprise from a lawsuit for patent infringement against another enterprise. In this case, an enterprise’s lawsuit for patent infringement is Contingent Asset for the Enterprise. However, it is a Contingent Liability for the Company at receiving the end of the lawsuit/responder to the lawsuit.

AccountingTools

An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2022. If an entity applies those amendments for an earlier period, it shall disclose that fact. Although a constructive obligation is not created solely by a management decision, an obligation may result from other earlier events together with such a decision. For example, negotiations with employee representatives for termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met.

No obligation arises for the sale of an operation until the entity is committed to the sale, ie there is a binding sale agreement. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An entity tests these assets for impairment under IAS 36 Impairment of Assets. Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events. In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. The request asked whether the measurement of the liability for the obligation to deliver allowances should reflect current values of allowances at the end of each reporting period if IAS 37 was applied to the liability.

(a) Type of obligation The obligation could be a legal one, arising from a court case or some kind of contractual arrangement. Most candidates are able to spot this in exams, identifying the presence of a potential obligation of this type. At the start of the year, Rey Co sets a profit target of $10m for the year ended 31 December 20X8. The chief accountant of Rey Co has reviewed the profit to date and realises they are likely to achieve profits of $13m. The accountant knows that if Rey Co reports a profit of $13m, directors will not get any more of a bonus than if they full disclosure definition and meaning reported $10m. The ‘not-to-prejudice‘ exemption in IAS 37.92 is also applicable to contingent liabilities.

Contingent liabilities

This Standard becomes operative for annual financial statements covering periods beginning on or after 1 July 1999. If an entity applies this Standard for periods beginning before 1 July 1999, it shall disclose that fact. Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract as defined in paragraph 10. These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Such expenditures are recognised on the same basis as if they arose independently of a restructuring.

Unconsolidated amendments

Other examples include benefits to be received from an estate or other court settlement. Anticipated mergers and acquisitions are to be disclosed in the financial statements. Let’s say Company ABC has filed a lawsuit against Company XYZ for infringing a patent. If there is a decent chance that Company ABC will win the case, it has a contingent asset. This potential asset will generally be disclosed in its financial statement, but not recorded as an asset until the lawsuit is settled.

The nature of the tax deposit—whether voluntary or required—does not affect this right and therefore does not affect the conclusion that there is an asset. The right is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity. In this case, Rey Co would include a provision for the $10m legal provision in liabilities.

Contingent assets are not recognised, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognised in the statement of financial position, because that asset is no longer considered to be contingent. A business may disclose the existence of a contingent asset in the notes accompanying the financial statements when the inflow of economic benefits is probable. Doing so at least reveals the presence of a possible asset to the readers of the financial statements. Contingent liabilities are subject to continuous reassessment due to the possibility of their development differing from initial expectations. This ongoing evaluation is crucial to ascertain whether a probable outflow of resources has become probable.

Relationship between provisions and contingent liabilities

In the light of the feedback received on the draft IFRIC Interpretation  Uncertainty over Income Tax Treatments, the Committee considered whether to add a project on interest and penalties to its standard-setting agenda. Certain cases that can be considered to be such assets include any kind of lawsuit that the organization may have filed against any client or any other party. In such situations, usually, the organization receives a certain amount of funds as compensation for any loss that it had to bear due to the party against whom it has filed the complaint. This fund is a contingent asset since it is dependent on the outcome of the case. Based on this same example, Company XYZ would need to disclose a potential contingent liability in its notes and then later record it in its accounts, should it lose the lawsuit and be ordered to pay damages. Future operating losses Future operating losses do not meet the criteria for a provision, as there is no obligation to make these losses.

Both the above cases are related to events that may or may not happen for the organization, providing an uncertain situation. Therefore, it is necessary to be able to differentiate between them and understand when they may occur so that reading and understanding the financial statements become more useful and easier. A company involved in a lawsuit that expects to receive compensation has a contingent asset because the outcome of the case is not yet known and the dollar amount is yet to be determined.

An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material. Nonetheless, the Committee observed that entities do not have an accounting policy choice between applying IAS 12 and applying IAS 37  Provisions, Contingent Liabilities and Contingent Assets to interest and penalties. Instead, if an entity considers a particular amount payable or receivable for all editions – interest and penalties to be an income tax, then the entity applies IAS 12 to that amount. If an entity does not apply IAS 12 to a particular amount payable or receivable for interest and penalties, it applies IAS 37 to that amount. An entity discloses its judgement in this respect applying paragraph 122 of IAS 1  Presentation of Financial Statements if it is part of the entity’s judgements that had the most significant effect on the amounts recognised in the financial statements.

If minor defects were detected in all products sold, repair costs of 1 million would result. If major defects were detected in all products sold, repair costs of 4 million would result. The entity’s past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. In accordance with paragraph 24, an entity assesses the probability of an outflow for the warranty obligations as a whole. The Interpretations Committee noted that when the IASB withdrew IFRIC 3, it affirmed that IFRIC 3 was an appropriate interpretation of existing IFRS for accounting for the emission trading schemes that were within the scope of IFRIC 3. However, the IASB acknowledged that, as a consequence of following existing IFRS, IFRIC 3 had created unsatisfactory measurement and reporting mismatches between assets and liabilities arising from emission trading schemes.

Historically patent infringement lawsuits are quite common in some industries such as Pharma, Technology, etc.