part 1 recap: IAS 37: Provisions, Contingent Liabilities, and Contingent Assets

IAS 37: Provisions, Contingent Liabilities, and Contingent Assets

Overview

  • IAS 37 deals with provisions, contingent liabilities, and contingent assets.
  • When dealing with liabilities, consider obligating events (constructive or legal).

Contingent Liabilities

  • Contingent liabilities have two possible scenarios:
    • A provision that fails to meet the recognition criteria.
    • A possible obligation.

Probability Assessment

  • The standard focuses on whether an outcome is "more likely than not".
  • Timeline of probabilities ranging from 0% to 100%.
  • The midpoint (50%) serves as the threshold for "more likely than not".

Probable Outcome

  • If an outcome is more likely than not (probable):
    • Recognize a provision.
    • Create a journal entry.
    • Include it in financial statements.
    • This assumes it meets the definition and recognition criteria of a provision.

Possible Obligation

  • If an outcome is not more likely than not (less than 50%).
    • It's considered a possible obligation.
    • This automatically qualifies as a contingent liability.

Remote Outcome

  • If the outcome of a liability is very low, it's deemed remote.
  • Categories: Probable, Possible, and Remote, each with different accounting treatments.

Accounting Treatments Based on Probability

  • Probable:
    • Recognize an amount and disclose information related to the provision if it meets the definition and recognition criteria.
  • Possible (Contingent Liability):
    • Disclose the contingent liability.
    • Contingent liabilities are off-balance sheet, meaning no journal entry is made.
  • Remote:
    • Do nothing.
    • No journal entry, no disclosure, disregard it entirely.

Remote Threshold

  • A remote outcome typically has a cutoff point of 10%.
  • Single-digit probabilities (e.g., 9%, 1%) are considered remote.

Provisions Not Meeting Recognition Criteria

  • If a provision exists but doesn't meet the recognition criteria:
    • It defaults to becoming a contingent liability, even if the outcome was probable.