IAS 37 Provisions, Contingent Liabilities and Contingent Assets

International Accounting Standard 37

Overview of IAS 37

  • Issued: in 1998; followed by amendments
  • Effective date: 1 January 1999
  • What it does:
    • It contains definitions of a provision, contingent liability, contingent asset, etc.
    • It gives guidance on distinguishing provisions from other liabilities and on relationship between provisions and contingent liabilities.
    • It deals with recognition of both provisions and contingencies.
    • Provision shall be recognized when the following 3 conditions are met:
      1. An entity has a present obligation as a result of past event;
      2. Outflow of economic benefits to settle the obligation is probable; and
      3. Reliable estimate of the amount of obligation can be made.
    • Contingent liabilities and contingent assets shall not be recognized.
    • IAS 37 sets rules for measurement of provisions and discusses several factors to take into account in reaching the best estimate of provision:
      • Risk and uncertainties,
      • Present value,
      • Future events,
      • Expected disposals of assets.
    • Standard also deals with reimbursements of provisions by another party, changes in provisions and use of provisions.
    • It establishes application rules for recognition and measurement of 3 specific cases:
      1. Future operating losses;
      2. Onerous contracts; and
      3. Restructuring.
    • Number of disclosures is required.
    • In its appendices, standard summarizes main requirements of the standard in a transparent table, decision tree, examples of recognition and disclosures.

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