Provisions and contingencies .pdf

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2017/02/14

LEARNING OUTCOMES

PROVISIONS, CONTINGENT
LIABILITIES AND CONTINGENT
ASSETS

• EXPLAIN THE DIFFERENCE BETWEEN LIABILITIES, CONTINGENT LIABILITIES AND PROVISIONS.
• KNOW AND APPLY THE PRINCIPLES OF LEGAL AND CONSTRUCTIVE OBLIGATIONS.
• ANALYSE PRACTICAL EXAMPLES AND DETERMINE WHETHER THE AMOUNTS MUST BE CLASSIFIED
AS PROVISIONS, CONTINGENT LIABILITIES OR CONTINGENT ASSETS.

IAS 37 / SECTION 21

• ACCOUNT, MEASURE AND RECOGNISE PROVISIONS

INTRODUCTION TO IFRS, CHAPTER: 15

• TO BE ABLE TO PREPARE THE FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS / IFRS FOR
SMES.

PROVISIONS: IDENTIFICATION & RECOGNITION

PROVISIONS: IDENTIFICATION & RECOGNITION

• PROVISIONS ARE LIABILITIES WITH UNCERTAINTY REGARDING THE

• FIRST STEP IS TO DETERMINE WHETHER THERE IS ANY UNCERTAINTY
DEF

• A PROVISION IS ONLY RECOGNISED WHEN:
• THE ENTITY HAS A PRESENT LEGAL – OR CONSTRUCTIVE OBLIGATION TO FORFEIT ECONOMIC
BENEFITS AS A RESULT OF EVENTS IN THE PAST;

REC

• AMOUNT

TIMING

• IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES EMBODYING ECONOMIC BENEFITS WILL BE
REQUIRED TO SETTLE THE OBLIGATION, AND
• A RELIABLE ESTIMATE OF THE OBLIGATION CAN BE MADE

1

2017/02/14

PROVISIONS: IDENTIFICATION & RECOGNITION
• PRESENT OBLIGATION:

PROVISIONS: MEASUREMENT
• @ BEST ESTIMATE
• TIME VALUE OF MONEY MATERIAL  DISCOUNT (EX15.7 LATER)

• LEGAL OBLIGATION

 ENFORCEABLE BY LAW

• CONSTRUCTIVE OBLIGATION  ACTIONS OF AN ENTITY CREATES A VALID
EXPECTATION
• EX 15.4 & 15.5 & 15.6 (SS)

PROVISIONS: SUNDRY ASPECTS
• RIGHT OF RECOVERY AGAINST A THIRD PARTY
• RECOGNISE THIS AS A SEPARATE ASSET WHEN YOU ARE FACTUALLY CERTAIN, MAY
NOT OFFSET

• TAKE INTO ACCOUNT ALL PROBABILITIES
• NB! REMEMBER THAT MEASUREMENT IS AFTER IDENTIFICATION AND RECOGNITION. THEN YOU
DO NOT EVALUATE THE PROBABILITY ANYMORE, YOU HAVE ALREADY DETERMINED THAT IT IS
PROBABLE, NOW ALL PROBABILITIES SHOULD BE TAKEN INTO ACCOUNT AND ADDED – EX.
15.8

PROVISIONS: SUNDRY ASPECTS
• FUTURE OPERATING LOSSES
• MAY NOT RECOGNISE, REFERS TO FUTURE EVENTS, THUS NOT A PRESENT
OBLIGATION

• IN THE STATEMENT OF PROFIT/LOSS AND OCI THE INCOME AND EXPENSE LEG MAY
BE SET OFF
• AMOUNT OF RECOVERY MAY NOT EXCEED THE PROVISION
• EX 15.9

2

2017/02/14

PROVISIONS: SUNDRY ASPECTS
• ONEROUS CONTRACTS

PROVISIONS: SUNDRY ASPECTS
• EXECUTORY CONTRACTS:

• A CONTRACT IN WHICH THE UNAVOIDABLE COSTS OF FULFILLING THE OBLIGATIONS
EXCEEDS THE ECONOMIC BENEFITS EXPECTED TO BE RECEIVED UNDER IT

• NEITHER OF THE PARTIES INVOLVED HAS PERFORMED / BOTH HAVE PERFORMED TO
AN EQUAL EXTENT

• RECOGNISE THE OBLIGATION @:

• ONLY RECOGNISE WHEN ONE OF THE PARTIES HAVE PERFORMED

• LOWER OF:

• EX 15.11

• THE LOSS THAT WOULD BE INCURRED BY SPECIFIC FULFILMENT OF THE
CONTRACT, AND
• THE LOSS INCURRED IF THE CONTRACT WERE TO BE CANCELLED AND
THE PAYMENT OF FINES ASSOCIATED WITH THE CANCELLATION
• EX 15.10

PROVISIONS: SUNDRY ASPECTS
• RESTRUCTURING
• IFRS FOR SMES

PROVISIONS: DISCLOSURE
• NB – P435
• EX 15.12

3

2017/02/14

CONTINGENT LIABILITIES
• A CONDITION OR CIRCUMSTANCE OF WHICH THE EVENTUAL RESULT, BE IT BENEFICIAL OR
PREJUDICIAL, WILL ONLY BE CONFIRMED UPON THE OCCURRENCE OR NON-OCCURRENCE OF ONE
OR MORE UNCERTAIN FUTURE EVENTS, BEYOND CONTROL OF THE ENTITY.
• POSSIBLE OBLIGATION

• UNCERTAINTY ABOUT THE EXISTENCE

OR

• NOT RECOGNISED, ONLY DISCLOSED
• EX 15.13

ACTUAL PRESENT OBLIGATION

IMPROBABLE THAT RESOURCES WILL BE
UTILISED TO SETTLE THE OBLIGATION, OR
THE INABILITY TO MEASURE THE AMOUNT
RELIABLY.

DIFFERENCE BETWEEN PROVISION AND CONTINGENT
LIABILITY
• THE DEGREE OF FULFILLING THE REQUIREMENTS OF IDENTIFICATION (DEGREE OF
UNCERTAINTY)
• PROVISION: THERE IS CERTAINTY ABOUT THE EXISTENCE OF THE OBLIGATION, THE
UNCERTAINTY IS WRT THE TIMING AND AMOUNT OF SETTLEMENT
• CONTINGENT LIABILITY: THERE IS UNCERTAINTY ABOUT THE EXISTENCE OF THE LIABILITY
(POSSIBLE OBLIGATION) OR THERE IS TOO MUCH UNCERTAINTY ABOUT THE TIMING AND THE
AMOUNT OF THE ECONOMIC RESOURCES (IMPROBABLE THAT ECONOMIC RESOURCES WILL BE
REQUIRED OR THE AMOUNT CAN NOT BE MEASURED RELIABLY)
• EX 15.1

CONTINGENT LIABILITIES

DIFFERENCE BETWEEN PROVISION AND CONTINGENT
LIABILITY
• DECISION TREE: P 420
PRESENT OBLIGATION
AS A RESULT OF
OBLIGATING EVENT?

NO

YES
A PROBABLE OUTFLOW?

POSSIBLE OBLIGATION?

NO
DO NOTHING

YES
NO

OUTFLOW REMOTE?

NO

NO

YES

YES
RELIABLE ESTIMATE?
YES
PROVISION

DISCLOSE CONTINGENT
LIABILITY

4

2017/02/14

DIFFERENCE BETWEEN PROVISION AND CONTINGENT
LIABILITY
PRESENT
OBLIGATION THAT
PROBABLY REQUIRES
AN OUTFLOW OF
RESOURCES

POSSIBLE OBLIGATION
OR
PRESENT OBLIGATION WHERE
THE OUTFLOW OF ECONOMIC
RESOURCES IS IMPROBABLE

POSSIBLE OBLIGATION
OR
PRESENT OBLIGATION WHERE
THE OUTFLOW OF ECONOMIC
RESOURCES IS REMOTE

CONTINGENT ASSET
• A POSSIBLE ASSET THAT ARISES FROM PAST EVENTS, THE EXISTENCE OF WHICH WILL BE
CONFIRMED ONLY BY THE OCCURRENCE OR NON-OCCURRENCE OF ONE OR MORE
UNCERTAIN FUTURE EVENTS NOT WHOLLY WITHIN THE CONTROL OF THE ENTITY.
• NOT RECOGNISED, DISCLOSE IF PROBABLE, BUT NOT FACTUALLY CERTAIN.
• EX 15.14 & 15.15
• FACTUALLY CERTAIN

PROBABLE INFLOW, NOT FACTUALLY CERTAIN

RECOGNISE ”NORMAL” ASSET

RECOGNISE AND
DISCLOSE
PROVISION

NO PROVISION
DISCLOSE CONTINGENT
LIABILITY

RECOGNISE NOTHING, DISCLOSE CONTINGENT ASSET

 IMPROBABLE

RECOGNISE/DISCLOSE

NO PROVISON
NO CONTINGENT LIABILITY

TERMINOLOGY
• REMOTE

IMPROBABLE

 PROBABLE  HIGHLY PROBABLE

QUESTIONS
 FACTUALLY CERTAIN

• QUESTION 1: CLASS DISCUSSION
• HOMEWORK:
• QUESTION 3: PROVIDER

NOTHING

• QUESTION 4: UPSTAGE

CONTINGENT
LIABILITY

LIABILITY

• QUESTION 6: GUILTY

PROVISION
CONTINGENT
ASSET

ASSET

5


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