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Chapter 17 Provisions, Contingencies and Events IFRS Provisions, Contingencies & Events after the Reporting Period 540 Chapter 17 Chapter 17 Provisions, Contingencies and Events after

Mar 08, 2018

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  • Gripping IFRS Provisions, Contingencies & Events after the Reporting Period

    Chapter 17

    540

    Chapter 17 Provisions, Contingencies and

    Events after the Reporting Period

    Reference: IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 10 Events After the Reporting Period

    IFRIC 1 Changes in Decommissioning, Restoration and Similar Liabilities Contents:

    Page

    1. Introduction

    542

    2. Definitions (provided in IAS 37)

    542

    3. Liabilities, provisions and contingent liabilities 3.1 Recognition: liabilities and provisions

    3.1.1 Present obligations 3.1.2 Past events

    Example 1: obligating events Example 2: obligating events

    3.1.3 Probable outflow of future economic benefits 3.1.4 Reliable estimate

    3.2 Recognition: contingent liabilities 3.3 Measurement: liabilities, provisions and contingent liabilities

    3.3.1 Best estimates and expected values Example 3: best estimate using expected values

    3.3.2 Risks and uncertainties 3.3.3 Future cash flows and discounting

    Example 4: discounting liabilities to present values; journals Example 5: calculating present (discounted) values and related journals

    3.3.4 Future events Example 6: future events

    3.3.5 Gains on disposals of assets Example 7: gains on disposals of assets

    3.3.6 Reimbursements Example 8: reimbursements Example 9: reimbursements

    3.3.7 Changes in provisions Example 10: change in a decommissioning provision

    3.3.8 Reduction of provisions 3.4 Other specific issues

    3.4.1 Contracts Example 11: onerous contracts

    3.4.2 Restructuring provisions Example 12: restructuring costs

    543 543 543 544 544 544 545 545 545 546 546 546 547 547 547 548

    550 550 550 550 551 551 552 552 552 554 554 554 554 555 555

    4. Assets: contingent assets

    4.1 Recognition 4.2 Measurement

    5. Disclosure: provisions, contingent liabilities and contingent assets 5.1 Provisions

    Example 13: disclosure: decommissioning provision (change in estimate) 5.2 Contingent liabilities 5.3 Contingent assets 5.4 Exemptions from disclosure requirements

    556 556 556 556 556 557 559 559 559

  • Gripping IFRS Provisions, Contingencies & Events after the Reporting Period

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    Contents continued

    Page

    6. Events after the reporting period 6.1 Overview 6.2 Adjusting events after the reporting period

    Example 14: event after the reporting period 6.3 Non-adjusting events after the reporting period

    Example 15: event after the reporting period 6.4 Dividends 6.5 Exceptions: no longer a going concern

    Example 16: events after the reporting period - various

    559 559 560 560 561 561 561 561 562

    7. Disclosure: events after the reporting period

    564

    8. Summary 565

  • Gripping IFRS Provisions, Contingencies & Events after the Reporting Period

    Chapter 17

    542

    1. Introduction This chapter covers two standards: IAS 37 and IAS 10. The standard, IAS 37, covers certain types of liabilities and assets whereas IAS 10 deals with events that occur after the reporting period but before the financial statements are authorised for issue. In IAS 37, the focus is on liabilities and assets that are subject to some type of uncertainty. Both liabilities and assets are defined in the Framework and it would be beneficial for you to refresh your memory of these two definitions before continuing. The discussion of the standard on provisions and contingencies (IAS 37) will be covered in three separate stages: first we will investigate the recognition of liabilities; then the recognition of assets and then the disclosure of liabilities and assets. It is important that you get to know the definitions used in IAS 37. 2. Definitions (provided in IAS 37) Provision: A liability of uncertain timing or amount. Liability (framework) a present obligation (legal or constructive); of the entity; as a result of a past event; the settlement of which is expected to result in an outflow of future economic benefits. Obligating event: An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. Legal obligation: An obligation that derives from a contract (through its explicit or implicit terms); legislation; or other operation of law. Constructive obligation: An obligation that derives from: an entitys 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. Contingent liability: There are two types of contingent liabilities defined (slightly modified wording). A possible obligation from past events; 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 (e.g. a possible negative court ruling)

    OR A present obligation from past events that is not recognised because (the recognition criteria are not met):

    it is not probable that an outflow of economic benefits will be needed to settle the obligation; or

    the amount of the obligation cannot be measured with sufficient reliability.

  • Gripping IFRS Provisions, Contingencies & Events after the Reporting Period

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    Contingent asset: A possible asset that 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 (e.g. a possible positive court ruling).

    Onerous contract: (slightly modified wording) A contract where:

    the unavoidable costs of meeting the terms of the contract exceed the benefits to be derived from the contract.

    Restructuring: a programme that is planned and controlled by management and materially changes either:

    the scope of the business undertaken by the entity; or the manner in which the business is conducted.

    3. Liabilities, provisions and contingent liabilities (IAS 37.14 .30 & .36 .52) 3.1 Recognition: liabilities and provisions (IAS 37.14 .30) A provision is simply a liability where either (or both) the amount or the timing is uncertain. Provisions and liabilities are both recognised in the statement of financial position but are disclosed separately from one another. It needs to be remembered that before an element may be recognised (provided for), both the definition of the element and the recognition criteria need to be met. Whereas contingent liabilities are never recognised, pure liabilities and provisions are recognised if they: meet the definition of a liability; and meet the recognition criteria:

    a reliable estimate of the liability must be possible; and the outflow of future economic benefits must be probable.

    The most fundamental part of the definition is that there must be an obligation. Deciding whether or not there actually is an obligation is frequently difficult, and is an exercise that requires much professional judgement. There is a thin line separating pure liabilities, provisions and contingent liabilities. 3.1.1 Present obligations (IAS 37.15 .16) In very rare instances, it may be difficult to determine if there is a present obligation or even if there is a past event. In these instances, the entity must decide if it is: more likely that a present obligation did exist at year-end, in which case a provision is

    recognised; or more likely that a present obligation did not exist at year-end, in which case a

    contingent liability is disclosed (unless the possible outflow of future economic benefits is remote).

    In making this decision, the entity uses its professional judgement, other expert opinions (e.g. legal opinion) and events after the reporting period. An example of such a situation is when a court case is in progress at year-end, where there is no indication as to whether an entity has an obligation or even whether the deed that the entity is being accused of actually occurred (i.e. whether there is a past event at all).

  • Gripping IFRS Provisions, Contingencies & Events after the Reporting Period

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    544

    3.1.2 Past events (IAS 37.17 .22) For an event to lead to a present obligation there must be an obligating event. An obligating event is one that leaves the entity with no realistic alternative but to settle the liability. There are two types of obligations possible: a legal obligation, and a constructive obligation. The past event must: exist independent of the entitys future actions. This is known as the walk-away test,

    i.e. if the company closed down today, would the obligation still exist? always includes another party (the third party) besides the entity. The standard does,

    however, state that the this other party does not need to be known, i.e. it could be the public at large.

    This means that a decision made at a board meeting would not lead to a present obligation because this event does not involve a third party and is not separate from the entitys future actions (its future actions could be changed if the board later decides to change its mind). Example 1: obligating events Consider the following issues that were discussed during a directors meeting on 24 December 20X3: A: A decision was made by the directors to pay

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