This document summarizes accounting guidance on provisions according to IAS 37. It defines a provision as a present obligation from a past event that will likely require a future outflow of resources and can be reliably estimated. Provisions should be recognized if the criteria are met. Measurement of provisions involves estimating the required expenditure to settle the obligation, using the most likely amount or probability-weighted expected value and discounted if material. Checks are recommended to validate the appropriateness and completeness of provisions for items like damaged stock, slow moving inventory, and doubtful debts. Disclosures for provisions should include accounting policies, movements during the period, and separate reporting not with other payables.

1. Provision
IAS-37
Md. Timur Arafat
Hoda Vasi Chowdhury & Co
Tax Employee benefits
Warranties &
guarantee
Future operating
losses
Pollution to
clean up
Staff retraining for
law changes
Loss seems in
court case
Repairs and
maintenance

2. Definition
Present obligation as a result of a past event, whereby-
Settlement of the obligation - require future outflow of resources
Uncertain amount or timing
Reliable estimate is feasible

3. Recognizing a provision
Start
Present obligation as a
result of an obligating
event
Provision Do nothing
Disclose contingent
liability
Possible obligation ?
Reliable estimate ?
Probable
outflow ?
Remote?
No
No
No (rare)
No
No
Yes
Yes
Yes
Yes Yes

4. Measurement of provisions
Best estimate of expenditure to settle the present obligation at balance sheet date
- Most likely amount
- Probability-weighted expected value
- Discounted PV using a pre-tax discount rate and the risks specific to the liability
Adjust to reflect the current best estimate.
No longer probable? Then reverse.

5. - Obtain details of the basis and ensure adequacy, correctness and consistency
What required to check ?
- Check appropriateness considering the nature of business
- Review the stock sheets (damaged, slow moving or obsolete items correctly written?)
- Review WIP (ensure that provision has been made against any ‘old’ jobs)
Assessing the need for any further provision: (consider following)
- Production levels are falling ?
- Stock levels are high in comparison to orders received and anticipated demand ?
- Any fluctuations in cost or selling price ? and
- Likely change in technology or market demands ?
- Ensure adequate provision for all bad and doubtful trade debts.
- Subsequent position check – (was the estimation reasonable ?)

6. Ensure its completeness by reviewing:
(a) the previous year’s provisions
(b) items recorded on the bank certificate;
(c) minutes of meetings;
(d) major contracts
(e) Correspondence and
(f) Ageing
What required to check ?
- Sampling of stock and WIP items
- compare costs to (selling price - expenditure for realization)
- Losses on one line cannot be set off against profits on another, so check such instances, and
- Provision is made on a finished product?  YES ?  ensure provision against
WIP and materials in the process.
excessive provisions
deliberate
overstatement

7. – Accounting policies for each major type of provision (for example, warranties)
– Movements in provisions during the period
– Confirm in the letter of representation
– Report separately. (Not with trade and other payables)
Disclosures

8. Any Questions ?