Contingent assets are possible assets whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events that are not wholly within the control of the entity. Contingent assets are not recognised, but they are disclosed when it is more likely than not that an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an asset is recognised in the statement of financial position, because that asset is no longer considered to be contingent. Contingent liabilities also include obligations that are not recognised because their amount cannot be measured reliably or because settlement is not probable. Contingent liabilities do not include provisions for which it is certain that the entity has a present obligation that is more likely than not to lead to an outflow of cash or other economic resources, even though the amount or timing is uncertain.

• Where the realisation of income is virtually certain, the related asset is recognised appropriately.
• IFRIC 1 in relation to provisions for decommissioning, restoration and similar liabilities requires that the periodic unwinding of the discount is recognised in profit or loss as a finance cost as it occurs.
• The entity’s future actions will determine only the means by which the entity settles its present obligation—whether it purchases positive credits from another entity or generates positive credits itself by producing or importing more low-emission vehicles.
• Entities anxious to accelerate or postpone recognition of a liability could do so by advancing or deferring an event that signals such a commitment, such as a public announcement, without any change to the substance of their position.
• Rather than allowing an entity to build up a provision for the required costs over the life of the facility, IAS 37 requires that the liability is recognised as soon as the obligation arises.

The result of this is that the depreciation charge recognised in profit or loss over the life of the component of the asset requiring regular repair may be equivalent to that which would previously have arisen from the combination of depreciation and a provision for repair. This is the way IAS 16 requires entities to account for significant parts of an item of property, plant and equipment which have different useful lives. Similarly, in the case of the aircraft overhaul,the example in the standard states that an amount equivalent to the expected maintenance costs is depreciated over three years. This is the wayIAS 16 requires entities to account for significant parts of an item of property, plant and equipment which have different useful lives. A provision is measured based on the entity’s best estimates of the expenditure required to settle the present obligation at the end of the reporting period or to transfer it to a third party at that time. Because of this, the measurement of the provision requires lots of management judgment in the area of risk and uncertainties.

#2: What is contingent liability?

The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability. The nature of the tax deposit—whether voluntary or required—does not affect this right and therefore does not affect the conclusion that there is an asset. The right is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. Contingent assets are not recognized in financial statements since this may result in the recognition of income that may never be realized. Another interaction arises in relation to onerous contracts.

• The Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine whether, in the fact pattern described in the request, it has an obligation that meets the definition of a liability in IAS 37.
• All the below conditions need to be fulfilled in order to recognise a provision.
• Accordingly, the determination of whether an obligation exists independently of an entity’s future actions can be a matter of judgement that depends on the particular facts and circumstances of the case.
• Though it has not been made mandatory to recognise contingent liabilities in the books of accounts, yet AS-37 make it necessary to make disclosures if the possibility of an outflow of resources comprising economic benefits is not remote.

IAS 37 only requires an entity to disclose the contingent liability in the financial statements unless the possibility of an outflow of resources is remote. Furthermore, IAS 37 does not apply to provisions, contingent liabilities, and contingent assets covered by another Standard. Examples are financial instruments (including guarantees) that are within the scope of IFRS 9, current and deferred tax liabilities (IAS 12), as well as provisions relating to employee benefits (IAS 37.1c, 37.2, and 37.5). IAS 37 prescribes the accounting treatment for nearly all of an entity’s liabilities.

#6: Can an entity recognise the provision for future operating losses?

Presumably these additional restrictions areintended to ensure that the entity does not contravene (breach) the general prohibition in IAS 37 against provision for future operating losses. The standard requires that where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation. The discount rate (or rates) to be used inarriving at the present value should be ‘a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. A contingent asset is defined in a more intuitive way.

Consequently, the Committee decided not to add a project on interest and penalties to its standard-setting agenda. IAS 37 applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation (IFRS 5Appendix A), additional disclosures may be required by IFRS 5 (IAS 37.9). This course is part of the IFRS Certificate Program — a comprehensive, integrated curriculum that will give you the foundational training, knowledge, and practical guidance in international accounting standards necessary in today’s global business environment.

UK’s FRC issues guidance for reporting under IAS 37: Provisions, Contingent Liabilities, and Contingent Assets

The remainder that is expected to be met by other parties is treated only as a contingent liability. Except when an obligation is determined to be joint and several, any form of net presentation in the statement of financial position is prohibited. This is because the entity would remain liable for the whole cost if the third party failed to pay for any reason, for example as a result of the third party’s insolvency. In such situations,the provision should be made gross and any reimbursement should be treated as a separate asset (but only when it is virtually certain that the reimbursement will be received if the entity settles the obligation). In such situations, the provision should be made gross and any reimbursement should be treated as a separate asset (but only when it is virtually certain that the reimbursement will be received if the entity settles the obligation). This analysis is specific to a no win-no fee arrangement related to a contingent asset and may not be appropriate in other circumstances.

Where the realisation of income is virtually certain, the related asset is recognised appropriately. Provisions are measured at the best estimate (including risks and uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material. Otherwise, it can be easy to mistakenly argue that a provision is required, such as for training costs to ensure that staff comply with new legal requirements, on the basis that the entity has a constructive obligation to ensure staff are appropriately skilled to adequately meet the needs of its customers. However, the obligation, constructive or not, declared or not, relates to the entity’s future conduct, is a future cost of operation and is therefore ineligible for recognition under the standard until the training takes place. In the normal course of business it is unlikely that provisions for staff training costs would be permissible, because it would normally contravene (breach) the general prohibition in the standard on the recognition of provisions for future operating costs.

Clearly IFRS — IASB publishes package of narrow-scope amendments to IFRS Standards

If the related asset is measured using the cost model, the change in the liability should be added to or deducted from the cost of the asset to which it relates. Where the change gives rise to an addition to cost, the entity should consider the need to test IAS 37 – Provisions, contingent liabilities and contingent assets the new carrying value for impairment. This is particularly relevant for assets approaching the end of their useful life, as their remaining economic benefits are often small compared to the potential changes in the related decommissioning liability.

The standard expects strict application of the requirement that, to qualify for recognition, an obligation must exist independently of an entity’s future actions. Even if a failure to incur certain costs would result in a legal requirement to discontinue an entity’s operations, no provision can be recognised. IAS 37 considers the example of an airline required by law to overhaul its aircraft once every three years. It concludes that no provision is recognised because the entity can avoid the requirement to perform the overhaul, for example by replacing the aircraft before the three year period has expired. Even if a failure to incur certain costs would result in a legal requirement to discontinue anentity’s operations, no provision can be recognised.

(c) a present obligation for which a sufficiently reliable estimate cannot be made (i.e. it meets the definition of a liability but does not meet the recognition criteria). In these rare circumstances, a liability cannot be recognised and it is disclosed as a contingent liability. The measures require an entity that receives negative credits for one year to eliminate these negative credits by obtaining and surrendering positive credits. The entity can obtain positive credits either by purchasing them from another entity or by generating them itself in the next year (by producing or importing more low-emission vehicles). If the entity fails to eliminate its negative credits, the government can impose sanctions on the entity.

The discount rate(s) shall not reflect risks for which the future cash flow estimates have been adjusted.’ [IAS 37.47]. However, it is worth noting that no discounting is required for provisions where the cash flows will not be sufficiently far into the future for discounting to have a material impact. The standard discusses the possibility that an event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or an act by the entity (such as a sufficiently specific public statement) which gives rise to a constructive obligation. Changes in the law will be relatively straightforward to identify. The only issue that arises will be to determine exactly when that change in the law should be recognised.