Contingent liabilities and onerous contracts

Contingent liabilties

Transactions dependent on another event to exist

IFRS - contingent liability when criteria not met, provision for when criteria is met but timing is uncertain

Recognition of contingent provision criteria (3)

1. Present obligation arising from past action

2. Probable that entity faces outflow of economic resources

3. Entity can make a reliable estimate

IAS 37 probability ranges for contingencies

Remote / Low

Possible

Probable (>50%)

Measurement of provision

Record based on most reliable estimate through weighting (expected value), or mid-point, or single best estimate

Disclosure of contingencies

When contingency meets criteria, disclosure is required

1. Description of nature, timing, and uncertainty

2. Amount expected to be reimbursed

When criteria for recognition not met, outflow is liability instead of provision and 2 outcomes are set: do not record but disclose or do not record or disclose

Contingent assets

Stricter as they are not permitted to be recognized unless it is certain to occur

ASPE 3290 differences for contingencies

Terminology - contingent loss instead of provision

Contingent gain only recognized when 100% probability

ASPE uses “likely” which is higher than probable

Disclosure required when likely but not measurable

No disclosures needed for low probability outcomes

Onerous contracts - IFRS

Contract where unavoidable costs for meeting he obligations exceed the benefits

not cancellable contracts without fees

Initial measurement of onerous contract

A provision is recognized and loss flows through profit/loss

Dr. Loss on onerous / Cr. Provision for onerous contract

Lower of net cost (new profit - old costs) of contract or penalty paid for cancellation

Subsequent measurement of onerous contract

Adjust to best estimate every reporting period

Readjust provision after doing a partial purchase

Onerous contracts under ASPE

ASPE 1000.28-30 does not recognize onerous contracts, treat instead as a liability