ias 37 by mian mohsin mumtaz

3.  MOHSIN MUMTAZ
 ABDUL QAYYUM
 MUHAMMAD ISHFAQ
 ADNAN SULEMAN
 SADDAM HUSSAIN

4. IAS 37

5.  What is a provision?
 A provision is a liability of uncertain timing or
amount.
 A liability is a present obligation of the entity
arising from past events, the settlement of
which is expected to result in an outflow from
the entity of resources embodying economic
benefits.

6.  Provisions were often recognised as a result
of an intention to make expenditure, rather
than an obligation to do so.
 Several items could be aggregated into one
large provision that was reported as an
exceptional item (the ‘big bath’).
 Inadequate disclosure meant that in some
cases it was difficult to ascertain the
significance of the provisions and any
movements in the year.

7.  The objective of IAS 37 Provisions, contingent
liabilities and contingent assets is to ensure
that:
 Appropriate recognition criteria an measurement
bases are applied to provisions, contingent
liabilities and contingent assets
 Sufficient information is disclosed in the notes to
the financial statements to enable users to
understand their nature, timing and amount.

8.  A provision should be recognised when:
 If any one of these conditions is not met, no
provision may be recognised.
 An entity has a present obligation (legal or
constructive) as a result of a past event
 It is probable that an outflow of resources
embodying economic benefits will be required
to settle the obligation, and
 A reliable estimate can be made of the amount
of the obligation.

9. PRESENTED BY

10.  A provision may be necessary as a result of
 A legal or
 A constructive obligation.
 Legal obligation
 A legal obligation is an obligation that derives
from:
 A contract
 Legislation
 Other operation of law.

11.  A constructive obligation is an obligation
that derives from an entity’s actions where:
 By an established pattern of past practice,
published policies or a sufficiently specific
current statement, the entity has indicated to
other parties that it will accept certain
responsibilities, and
 As a result, the entity has created a valid
expectation on the part of those other parties
that it will discharge those responsibilities.

12.  A retail store has a policy of refunding purchases
by dissatisfied customers, even though it is
under no legal obligation to do so. Its policy of
making refunds is generally known.
 Should a provision be made at the year end?

13.  The amount recognised as a provision should
be:
 A realistic estimate
 A prudent estimate of the expenditure needed
to settle the obligation existing at the reporting
date
 Discounted whenever the effect of this is
material.

14. PRESENTED BY

15.  Methods of measuring uncertainties
include:
 Weighting the cost of all probable outcomes
according to their probabilities (‘expected
value’)
 Considering a range of possible outcomes.

16.  An entity sells goods with a warranty covering
customers for the cost of repairs of any defects that
are discovered within the first two months after
purchase. Past experience suggests that 88% of the
goods sold will have no defects, 7% will have minor
defects and 5% will have major defects. If minor
defects were detected in all products sold, the cost
of repairs would be $24,000; if major defects were
detected in all products sold, the cost would be
$200,000.
 What amount of provision should

17.  An entity has to rectify a serious fault in an item
of plant that it has constructed for a customer.
The most likely outcome is that the repair will
succeed at the first attempt at a cost of
$400,000, but there is a significant chance that a
further attempt will be necessary, increasing the
total cost to $500,000.

18.  Future operating losses
 No provision may be made for future
operating losses because they arise in the
future and therefore do not meet the
criterion of a liability.
 Onerous contracts
 An onerous contract is a contract in which the
unavoidable costs of meeting the obligations
under the contract exceed the economic
benefits expected to be received under it.

19.  A provision will be made for future environmental
costs if there is either a legal or constructive
obligation to carry out the work
 This will be discounted to present value at a
pretax market rate.

20. PRESENTED BY

21.  A restructuring is a programme that is planned and
controlled by management, and materially changes
either:
 The scope of a business undertaken by an entity, or
 The manner in which that business is conducted.
 A provision may only be made if:
 A detailed, formal and approved plan exists
 The plan has been announced to those affected.
 The provision should:
 Include direct expenditure arising from restructuring
 Exclude costs associated with ongoing activities.

22.  A contingent liability is:
 A possible obligation that arises from past events 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, 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.

23.  A contingent asset is a possible asset that arises
from past events 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.

24. PRESENTED BY

25.  Contingent liabilities:
 Should not be recognised in the statement of
financial position itself
 Should be disclosed in a note unless the
possibility of a transfer of economic benefits
is remote.

26.  Contingent assets should not generally be
recognised, but if the possibility of inflows of
economic benefits is probable, they should
be disclosed.
 If a gain is virtually certain, it falls within the
definition of an asset and should be
recognised as such, not as a contingent asset.

27. Degree of probability of an
outflow/inflow of resources
Liability Asset
Virtually certain Provide Recognize
Probable Provide Disclose by
note
Possible Disclose by
note
No disclosure
Remote No disclosure No disclosure

28.  The principal disclosure requirements
regarding contingencies are:
 The nature of the contingency
 The uncertainties expected to affect the
ultimate outcome
 An estimate of the potential financial effect.