Program : BA(Hons) Accounting & Finance - Year 3 - Final Year Module : International Corporate Reporting - Final Year Assessment Subject : IAS 37 Provisions, Contingent Liabilities, Contingent Assets

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Contents
Introduction .................................................................................................................................2
Objectives of IAS 37................................................................................................................. 2
Scope of IAS 37........................................................................................................................ 2
Question 1....................................................................................................................................3
a) Provision .............................................................................................................................. 3
b) Disclosure Requirement for Provision .................................................................................... 3
c) Recognition of Provision ....................................................................................................... 4
Accruals ............................................................................................................................... 4
Prudence............................................................................................................................... 4
Materiality ............................................................................................................................ 5
d) Contingent Liability .............................................................................................................. 6
e) Contingent Asset................................................................................................................... 7
Conclusion...................................................................................................................................8
References ...................................................................................................................................9

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Introduction
IAS 37 Accounting standard primarily discusses about provisions, contingent assets
and contingent liabilities. Basically, a complete financial statement should contain all the vital
information to notify the users, as it may differ their opinion on the entity’s financial
performance. But in some cases, there are times where the outcomes and the total amounts
involved are yet to be confirmed in future events and there is no 100% certainty for the
transactions to take place.
Objectives of IAS 37
The main objective of this accounting standard is to ensure appropriate recognition
criteria and measurement bases are applied to provisions, contingent assets and contingent
liabilities and also to make sure enough information regarding all this are disclosed in the
financial statement.
Scope of IAS 37
IAS 37 does not apply to executory contracts and also those that are covered by other
accounting standards

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Question 1
a) Provision
provision is liability of uncertain timing or amount. It is an amount for an expense that an
entity decides to estimate now before having further information of its exact amount. There are
3 main characteristics to be fulfilled to recognise provision in a financial statement.
 There is a present obligation (either legal or constructive) as a result of a past event.
 There is a probable transfer of economic benefit to settle the obligation.
 Reliable measurement of the amount of the obligation can be made.
If the conditions are satisfied, the accounting treatment are as follows.
Dr Expenses (Statement of Profit or Loss)
Cr Provision (Statement of Financial Position)
If these conditions are not satisfied, no provision shall be recognised.
b) Disclosure Requirement for Provision
To disclose a provision, an entity should:
 Disclose all material of the provision.
 Nature of provision, including an indication of the timing of payment and details of any
significant uncertainties.
 The total changes on the provision during the current year, which includes the total
amount paid, revisions to the amounts, the opening and closing balances.

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c) Recognition of Provision
Accruals
Accruals is an accounting concept and all the financial statements are required to be prepared
by complying to this concept. Under this concept, it requires income and expenses to be
recognized in accounting period in which they occur or earned rather than on the cash basis.
Example, the provision for doubtful debt is recognised as an expense. This is done as soon as
the entity issue the invoice to the customer rather than waiting for a longer period to calculate
the exact uncollectible amount. The estimation can be done by referring to the previous
historical transactions that has been done with the customer.
 Company X has estimated that out of its €500,000 credit sales, a total of 6% are unlikely
to be collected. The accounting treatment to this scenario are as follows
Dr Bad Debts Expense €30,000
Cr Provision for Doubtful Debts €30,000
Prudence
Under this accounting concept, it requires professional judgements from the management of an
entity and ensure that there is a proper adoption of the necessary accounting policies and
estimates. This concept requires the accountant to exercise a degree of carefulness by not
overstating an income or asset and by not understating of expenses and liabilities of an entity.
The profit or income should be recognised only when it is received meanwhile the expenses
and losses should be recorded as soon as possible when it occurs.
 Company Y is currently facing a legal litigation in court. There is very high certainty
of the entity to lose the case. It is estimated that there is a probable outflow of economic
benefit of €500,000 in order to settle the obligation. The legal court case should be
recognised as a current liability in the company financial statement.
Dr Expense €500,000
Cr Provision €500,000

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Materiality
All the financial statements are prepared to help the users to make an economic decision for
future strategies of the entity. All the information that might affect the decision making are
considered as material. Thus, information included in financial statement must complete in all
material respect so that a true and fair view of the affairs of the entity can be presented. The
concept of materiality may differ depending on the size of the entity.
 Example: The accountant of Company Z unintentionally forgot to include a provision
of doubtful debt for a credit sales amounting to €100. This amount is considered
immaterial for a company worth multi-million dollars as it does not create any
significant impact on the financial statement and does not affect the decision makings
of the users.

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d) Contingent Liability
A contingent liability is probability of an obligation to arise because of a past event (e.g court
cases) where the existence will only be confirmed by the occurrence of one or more uncertain
future events (e.g.: court case judgement) which is not wholly within the entity’s control. Thus,
there is a probable outflow of economic benefit.
Or
Present obligation that arise because of a past event but is not recognised in the financial
statement due to the following reasons:
i. It is not yet certain that an outflow of resource embodying economic benefits will be
necessary to settle the obligation.
ii. There is no reliable measurement can be made to settle the obligation.
Accounting Treatment
i. Not recognised as liability in the financial statement.
ii. Not to be disclosed unless the probability of an outflow of resources embodying
economic benefits is remote (less than 5%)
iii. Continuous assessment is done to review the chances of outflow of resources
embodying the economic benefits

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e) Contingent Asset
A contingent asset is a probability of an asset to arise because of a past event (e.g: court cases)
where its existence will be confirmed only by the occurrence of one or more uncertain future
events (e.g: court case judgement) which is not wholly within the entity’s control. Thus, there
is a probable inflow of economic benefit.
Accounting Treatment
i. Should not be recognised as an asset in the financial statement
ii. Should only be disclosed when the chances of inflow of the economic benefit is
probable or certain.
iii. A continuous assessment is done to review the chances of the inflow of the resources
embodying the economic benefits.
Disclosure Requirements
i. A brief description of the nature for each type of contingent asset.
ii. If it is predictable, should disclose the estimations of the possible financial effects.
iii. If unable to provide the above information, or unable to disclose, the fact should be
disclosed to the users of the financial statement.

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Conclusion
As a conclusion, IAS 37 which consist of provision, contingent asset and contingent
liability has its specific requirements to be fulfilled and to be recognised in the financial
statement. If all the three main criteria are satisfied, it shall be recognised as a provision. If a
provision is recognised, necessary disclosure must be done to reflect it in the financial
statement as required by IAS 37. The recognition of provision for the accounting concept as
shown above also affects the financial statement and is necessary to be taken into consideration
when drafting the financial statement. Meanwhile, if only two criteria met the requirement, it
shall be recognised as contingent liability. Contingent liability has no effect to the financial
statement figures as its only disclosed as notes if the occurrence chances are higher than 10%.
But if the chances of occurrence are remote, no disclosures are required. Contingent assets is a
possible asset that may bring inflow of economic benefits to the entity. It also does not affect
any figures in financial statement unless it is a virtually certain gain, then it should be
recognised as an asset.

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References
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information. Available at:
http://accounting-simplified.com/financial-accounting/accounting-concepts-and-
principles/accounting-materiality.html
[Accessed October 13, 2016a].
Accrual Concept | Definition and Examples. Available at:
http://accountingexplained.com/financial/principles/accrual
[Accessed October 13, 2016b].
Accruals Concept - AccountingTools. Available at:
http://www.accountingtools.com/accruals-concept
[Accessed October 13, 2016c].
IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. Available at:
http://www.iasplus.com/en/standards/ias/ias37
[Accessed October 14, 2016d].
2015. IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IFRSbox. Available
at: http://www.ifrsbox.com/ias-37-provisions-contingent-liabilities-contingent-assets/
[Accessed October 16, 2016].
IAS 37 Provisions, Contingent Liabilities and Contingent Assets | IFRS standards tracker |
ICAEW. Available at: http://www.icaew.com/en/technical/financial-
reporting/ifrs/ifrs-standards/ias-37-provisions-contingent-liabilities-and-contingent-
assets
[Accessed October 14, 2016e].
Provision Definition - AccountingTools. Available at:
http://www.accountingtools.com/provision-definition
[Accessed October 15, 2016f].
Prudence Concept | Definition and Examples. Available at:
http://accountingexplained.com/financial/principles/prudence
[Accessed October 15, 2016g].
What is the prudence concept in accounting? - Questions & Answers - AccountingTools.
Available at: http://www.accountingtools.com/questions-and-answers/what-is-the-
prudence-concept-in-accounting.html
[Accessed October 15, 2016h].