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Webinar Slides: IFRS - Liabilities, Provisions and Contingencies

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Original air date:
Nov. 12, 2013
View recording at www.mhmcpa.com

Please join us for the fourth and final course in the 2013 Mayer Hoffman McCann IFRS Update Series discussing liabilities, provision and contingencies. This webinar series is designed to bring you up to date on developments surrounding International Financial Reporting Standards (IFRS).

Throughout this series, we have been discussing standards and current events happening at the International Accounting Standard Board, American Institute of Certified Public Accountants, Securities and Exchange Commission and other relevant governance bodies. In this session, we will focus on IFRS accounting requirements for liabilities, provisions and contingencies.

Published in Economy & Finance , Business
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  • 1. Executive Education Series: IFRS - IAS 37 Liabilities, Provisions and Contingencies Presented by: Marco Pulido, Shareholder November 12, 2013
  • 2. Before We Get Started…  To view this webinar in full screen mode, click on view options in the upper right hand corner.  Click the Support tab for technical assistance.  If you have a question during the presentation, please use the Q&A feature at the bottom of your screen. #MHMwebinar 1
  • 3. CPE Credit  This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic polling questions throughout the webinar.  External participants will receive their CPE certificate via email immediately following the webinar. #MHMwebinar 2
  • 4. Today’s Presenters Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has over 14 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards both in the U.S. and in Latin America with Big Four accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution and Manufacturing - Transportation - Utilities - Consumer Services Construction/Real Estate - Health Sciences – Financial Services – Agriculture. #MHMwebinar 3
  • 5. Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements. #MHMwebinar 4
  • 6. Today’s Agenda 1 IAS 37 key definitions 2 Identify transactions within the scope of IAS 37 3 Describe the requirements for recognizing provisions 4 Describe the requirements for disclosing contingent assets and liabilities 5 Measuring provisions 6 Identifying differences between IFRS and U.S. GAAP #MHMwebinar 5 5
  • 7. IAS 37 Key definitions  Provision: A liability of uncertain timing or amount.  Liability: A present obligation as a result of past events the settlement of which is expected to result in an outflow of resources.  Contingent liability: A possible obligation depending on the occurrence/ nonoccurrence of uncertain future events, or a present obligation but no probable outflow of economic benefits or amount cannot be reliably measured.  Contingent assets: A possible asset that arises from past events and whose existence will be confirmed only by the occurrence/nonoccurrence of uncertain future events. Contingent assets are not recognized, but are disclosed if probable. When realization is virtually certain, the asset is no longer a contingent asset. #MHMwebinar 6
  • 8. Scope  Relates to provisions and contingent assets/liabilities  Out of scope:     Financial instruments valued at fair value (FV) Executory contracts, unless they are onerous contracts Insurance contracts Provisions covered by other IFRS:       Construction Contracts (IAS 11) Income Taxes (IAS 12) Employee Benefits ( IAS 19) Leases (IAS 17) Business Combinations (IFRS 3) Insurance Contracts (IFRS 4) <IAS 37. IN1, 1 and 5> #MHMwebinar 7 7
  • 9. Recognition – Provisions Will be recognized when: A PROVISION is a liability, which settlement amount is not known when incurred • There is a present obligation (legal or implicit), derived from a past event. • An outflow of resources to settle the liability is probable (>50%) • An estimate may be reliably measured • In contrast, accounts payable are liabilities for goods or services that have already been received in which the level of uncertainty is minimal. • Not provisions: Adjustments to the book value of assets — such as depreciation, allowance for doubtful accounts, impairment of assets. <IAS 37. 7, 10, 11, 14> #MHMwebinar 8 8
  • 10. Recognition – Provisions Example – When should a provision be recognized in accordance with the definition of probable Situation Provision? Contingent liability disclosure? There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote. No No (IAS 37: 86) There is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. No Yes, disclosures are required for the contingent liability. (IAS 37: 86) A past event occurred which has resulted in a present obligation that probably requires an outflow of resources. Yes Yes, disclosures are required for the provision. (IAS 37: 84-85) #MHMwebinar 9 9
  • 11. Recognition – Contingent Liability Is an obligation:  That possibly 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 recognized 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. <IAS 37. 10> #MHMwebinar 1 10
  • 12. Recognition Provision, contingent liability or nothing? Present obligation as a result of an obligating event? No No Possible obligation Yes Yes Yes No Probable outflow? Remote? Yes No No Reliable estimate? Yes Provision #MHMwebinar Disclose contingent liability Do nothing 11
  • 13. Recognition – Contingent Assets  A possible asset that arises from past events and whose existence will be confirmed only by the occurrence/ nonoccurrence of uncertain future events that are not under the control of the company  When the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. Contingent assets are not recognized as an asset, instead, they are disclosed, when an inflow of economic benefits is probable. <IAS 37. 10, 31, 33, 34, and 35> #MHMwebinar 1 12
  • 14. Valuation Example: Recognition of contingent liabilities and assets Background: An entity is a defendant to a lawsuit that has a high probability of loss. If the entity incurs a loss, the entity’s insurance company may cover the loss. Question: What amount should the entity recognize as an asset and liability, if any? #MHMwebinar 13
  • 15. Valuation Example: Recognition of contingent liabilities and assets Background: An entity is a defendant to a lawsuit that has a high probability of loss. If the entity incurs a loss, the entity’s insurance company may cover the loss. Question: What amount should the entity recognize as an asset and liability, if any? Answer: • The entity should recognize a provision for the full liability, as it is highly probable to occur. • Must confirm that the loss on the lawsuit and recoverability of the claim from the insurance company are due to the same past event. • The entity should assess the effectiveness of the insurance policy. Unless there is doubt over the success of the insurance claim, the entity should recognize a reliable estimate of the recovery. #MHMwebinar 14
  • 16. Valuation – Best Estimate The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time • Judgment of management • Experience with similar transactions Estimate of outcome Time value of money • Independent expert opinions • Evidence provided by events after the reporting period. <IAS 37. 36 and 38> #MHMwebinar 15
  • 17. Valuation – Best Estimate Two methods for calculating best estimate: Individual case A large population of items MOST LIKELY OUTCOME However, must consider all possible outcomes EXPECTED VALUE Estimated by weighing all possible outcomes <IAS 37.39 - 51> #MHMwebinar 16
  • 18. Valuation Example: How to determine the probability that an obligation will occur Background  An entity is faced with one individual case.  The judgment has a probability of a:  40% win, with no loss, and  60% loss, with a loss of $1 million Question  Should a provision be recognized, and if so, for what amount? #MHMwebinar 17
  • 19. Valuation Example: How to determine the probability that an obligation will occur Background  An entity is faced with one individual case.  The judgment has a probability of a:  40% win, with no loss, and  60% loss, with a loss of $1 million Question  Should a provision be recognized, and if so, for what amount? Answer  Yes, for $1 million, since it is probable that a loss will be incurred.  Since this is a single case, a provision is recorded based on the most probable outcome.  The expected value method would not result in a reasonable estimation since a provision of $600,000 is not a result that may occur (only probable result is $1 million or $0). #MHMwebinar 18
  • 20. Valuation Example 2: How to determine the probability that an obligation will occur Background  An entity is faced with 100 legal cases  Each judgment has a probability of a:  40% win, with no loss, and  60% loss, with a loss of $1 million per judgment Question  Should a provision be recognized, and if so, for what amount? #MHMwebinar 19
  • 21. Valuation Example 2: How to determine the probability that an obligation will occur Background  An entity is faced with 100 legal cases  Each judgment has a probability of a:  40% win, with no loss, and  60% loss, with a loss of $1 million per judgment Question  Should a provision be recognized, and if so, for what amount? Answer  Yes, a provision for $60 million [(100 × $1 million) × 60%]  A provision is recognized using the expected value method since there is a large population of items. #MHMwebinar 20
  • 22. TRANSLATE TO ENGLISH Valuation Example 3: How to determine the probability that an obligation will occur Background  An entity provides product warranties for products sold for a cost of $1 million  Based on experience, there are different probabilities:  29.5% of only 1 failure  50.5% of 2 failures  20% of 3 failures Question  Should a provision be recognized, and if so, for what amount? #MHMwebinar 21
  • 23. TRANSLATE TO ENGLISH Valuation Example 3: How to determine the probability that an obligation will occur Background  An entity provides product warranties for products sold for a cost of $1 million.  Based on experience, there are different probabilities:  29.5% of only 1 failure  50.5% of 2 failures  20% of 3 failures Question  Should a provision be recognized, and if so, for what amount? Answer  Yes, for $2 million  The expected value is $1.91 million [(29.5% × $1M) + (50.5% × $2M ) + (20% × $3M)]  The probable value of the loss is $2 million (failed twice)  The expected value method supports the recognition of a provision for the most probable value IAS 37.40 implicitly indicates that when the most probable value and the expected value do not reflect similar results, normally it will be appropriate to recognize the result that reflects the expected outcome. #MHMwebinar 22
  • 24. Valuation – Financial Effect i.e. Discounting the Provision/Liability • Before income tax rate Discount Rate • Reflects the market assessments performed on the time value of money • Consider the risks specific to the liability The provision will increase in each period to reflect the passage of time, with a charge to interest expense. (Effective interest method) <IAS 37. IN6, 47 > #MHMwebinar 23
  • 25. Valuation – Reimbursements Reimbursements expected for existing provisions  An asset will be recognized when a reimbursement is virtually guaranteed.  For the entire or a portion of the liabilities that will be settled.  It will be treated as a separate asset and will not exceed the amount of the provision. Income Statement: The provision expense is presented net of the asset recognized for the reimbursement. <IAS 37.53 and 54> #MHMwebinar 24
  • 26. Changes in Provisions  Provisions should be reviewed at each balance sheet date and adjusted to reflect the best estimate at such date.  If the outflow of resources becomes unlikely, the provision should be reversed.  Provisions should be used only to meet expenditures for which they were created. <IAS 37. 59 and 61> #MHMwebinar 25
  • 27. Provisions for Restructurings These are examples of events that may fall under the definition of restructuring:      sale or termination of a line of business the closure of business locations changes in management structure — for example, eliminating a layer of management fundamental reorganizations that have a material effect on the nature and focus of the entity's operations Key condition for recognizing a provision: A binding sale agreement must be present. <IAS 37.10, 70, 78> #MHMwebinar 26
  • 28. IFRS vs. U.S. GAAP – Key Differences IFRS 1. Probable defined as “more-likelythan-not” (50%) 2. Measurement of provisions When there is a range of equally likely outcomes, the low end of the range is accrued. 3. Discounting provisions Frequent updates will be necessary since discount rate will be updated at each period 4. Restructuring provision Entity must be committed to a sale, i.e., binding sale agreement #MHMwebinar U.S. GAAP 1. Probable is defined as “likely to occur” (generally considered 70% to 80% likelihood) 2. Measurement of provisions When there is a range of equally likely outcomes, the middlepoint of the range is accrued. 3. Discounting provisions Discount rate used should be the same rate when the provision is first recorded 4. Restructuring provision Provision recorded when entity is “demonstratably committed” to a plan 27
  • 29. Questions? #MHMwebinar 28
  • 30. If You Enjoyed This Webinar…  View recordings of these previous EES courses:    IFRS: Impairment of Assets Comparing the AICPA's Private Company Framework to IFRS for SMEs Read this related publication:  Messenger 14-12: The SEC’s Report on IFRS - Steps Companies Can Take Now #MHMwebinar 29
  • 31. Today’s Presenters Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has over 14 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards both in the U.S. and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services Construction/Real Estate - Health Sciences – Financial Services – Agriculture. #MHMwebinar 30
  • 32. Connect with Mayer Hoffman McCann linkedin.com/company/ mayer-hoffman-mccann-p.c. @mhm_pc youtube.com/ mayerhoffmanmccann slideshare.net/mhmpc gplus.to/mhmpc facebook.com/mhmpc blog.mhmcpa.com #MHMwebinar 31