The objective of IAS 37 provision, contingent liabilities, and contingent assets, is to ensure that appropriate recognition criteria and measurement bases are applied to provision, contingent liabilities, and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.
- Those resulting from executory contracts, except where the contract is onerous. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent (for example, employment contract).
- Those covered by other standards
Provision is a liability of uncertain timing or amount.
A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by occurrence and non-occurrence of one or more uncertain future events not wholly within the control of the entity, or a present obligation that arises from the past event 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 obligation cannot be measured with sufficient reliability
A contingent asset is 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.
Accounting treatments according to IAS 37.
A provision should be recognized when and only when:
- An entity has the present obligation (legal or constructive) as a result of past events
- It is probable (i.e. more likely than not) 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. The standards note that it is only in extremely rare cases that reliable estimates will not be possible
Recognition of provision involves creating liability and an expense in the financial statements.
An entity shall not recognize a contingent liability. An entity should disclose a contingent liability in the notes unless the possibility of an outflow of resources embodying economic benefits is remote, in which case it should be ignored.
An entity shall not recognize a contingent asset- but should be disclosed where an inflow of economic benefit is probable. However, when the realization of income is virtually certain then the related asset is not a contingent asset and its recognition is appropriate.