Topic 8: IAS 37 Provision, Contingent Liabilities and Contingent Assets

What does IAS 37 deal with

Liabilities arising from legal disputed, environmental and domestic obligations and Liabilities arising under contracts that have become onerous

WHAT IS ‘Big Bath’

A creative accounting technique used to smooth profits without reasonable certainty that the provision would be required

What is a provision

A liability of uncertain timing or amount

Examples of provisions

Warrantee, Remediation obligations to clean up contaminated water/land, obligations related to refunds/

What is a legal obligation

An obligation which derives from a contract or legislation

What is a constructive obligation

Pattern of past or valid expectation

What are the two types of warranties

Assurance warranties, service warranties

EXAMPLES OF CONSTRUCTIVE OBLIGATIONS

Policies, public statements

Charactaristics of contingent liabilities

Lack reliable estimate of amount, not probable transfer of economic benefits, an no confirmation of obligation duties

What is a contingent liability

Possible or present obligation arising from past events

Examples of contingent liabilities

Lawsuits, Guarantees, Pending audits

What is a contingent asset?

A possible asset arising from past events, existence yet to be confirmed

Disclosure of contingent assets

Nature of contingency, uncertainties likely to affect outcome, estimate of financial effect