IAS 37 Provisions

This is a post of my own detailed and thorough explanation on the standards of the subject I'm taking, P2 Corporate Reporting (ACCA)

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IAS 37 Provisions
Provision is a liability of uncertain timing or amount. Liability is a present obligation as a result of past event or settlement that will result in an outflow.

Contingent liability - outflow
Probable outcome : Recognized provision
Possible outcome : Disclosure by way of note
Remote outcome : No disclosure

Contingent asset - inflow
Probable outcome : Disclosure by way of note
Virtually certain : Recognized as income
Others : No disclosure

There are three recognition that must be met :
Present obligation

• Legal - rules & regulation
• Constructive - past practice & company policy

Outflow

• Probable - more likely than not
• Possible - maybe
• Remote - unlikely

Measurement

• Amount based on best estimate is required to settle obligation 
• Present value of future cash flow
• Expected value by probability estimate

Future Operating Losses

No present obligation so no provision

Onerous Contract

It's a contract where cost of meeting the contract is more than future economic benefit (loss making contract). It is allowed to recognized a provision because there is legal obligation.

The provision amount is the LOWER of :

- cost of meeting contract

- penalty payment 

Provision for Restructuring

It is a sale/termination of a business line, closure of a business location or changes in management structure. It can be recognized when the following conditions are met :

- raised valid expectation

- detailed & formal plan

- approved before year end 

- communicated

The amount to be recognized is the expenditure directly attributable to restructuring. For example, termination costs and compensation costs.

Ends,