IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Last update: July 2023
Have you ever heard a joke about two accountants applying for a job?
During their interview, they were given a task to calculate a net profit figure based on available data.
After some while, interviewer asked them a question: “What result did you get? What is the net profit of this company?”
The first accountant replied: the net profit is 150 mil. USD.
And the second one asked: “What would you like it to be?”
Now guess which one got the job! 🙂
In fact, manipulation of profit figure by making and releasing various provisions back and forth was very popular “creative accounting practice” in the past.
No wonder, as there were no rules for making provisions. Therefore, many companies utilized so-called “big bath provisioning” in order to smooth profits.
This situation was addressed in 1998 when the standard IAS 37 Provisions, Contingent Liabilities and Contingent Assets was issued with its effective date from 1 July 1999.
What is the objective of IAS 37?
The Standard IAS 37 Provisions, Contingent Liabilities and Contingent assets sets the criteria for recognition and measurement of
- Provisions;
- Contingent liabilities;
- Contingent assets; and
requires a number of disclosures about these items in order to understand them better.
What is a provision?
Provision is a liability of uncertain timing or amount.
The word “uncertain” is very important here, because if timing and amount are certain or almost certain, then you don’t deal with the provision but with a payable or an accrual.
To understand provisions better, let’s break down the definition of a liability in IAS 37:
A liability is a present obligation arising from past event that is expected to be settled by an outflow of economic benefits from an entity.
In other words, if there is no past event, then there is no liability and no provision should be recognized.
Past event can create 2 types of obligation:
- Legal obligation that arises from legislation, a contract or other legal act; or
- Constructive obligation that arises from some business practice or customs and created an expectation in other parties to fulfill the obligation (in other words, people simply expect some company to fulfill the obligation even if it’s not in the law or any contract).
It does not really matter what type of obligation you deal with – whichever it is, it leads to a provision. However, if you identify the obligation, it can help you to decide whether recognize a provision or not.
When to recognize a provision?
The standard IAS sets 3 criteria for recognizing a provision:
- There must be a present obligation as a result of a past event;
- The outflow of economic benefits to satisfy the obligation must be probable (i.e. more than 50% probable)
- The amount of economic benefits required to satisfy the obligation must be reliably estimated.
If all 3 criteria are met, then you should recognize a provision.
If just one of them is not met, then you should either:
- Disclose a contingent liability (read more about it below), or
- Do nothing if the outflow of economic benefits is remote.
To get better understanding and guidance on provisions and contingencies, IAS 37 presents a decision tree, too.
If you are unsure whether to recognize a provision in a particular situation or not, just ask yourself a simple question:
Can the obligation be avoided by some future actions?
If yes, then you should NOT book a provision. For example, if a government introduced new tax legislation, does the tax consulting company need to spend a cash for training of its employees and thus recognize a provision for that training?
No, it does not have to. Tax consulting company can avoid the training and decide to stop its activities (OK, that’s a bit far-fetched and unlikely, but you get the point).
If you cannot avoid the obligation by some future action, then you have to recognize a provision.
For example, when you promised a free warranty service for defective products at the point of sale, then you have a present obligation. If your past statistics show that you needed to spend some cash for warranty repairs, then you need to make a provision.
How to measure a provision?
The amount of the provision should be measured at the best estimate of the expenditures required to satisfy the obligation at the end of the reporting period.
As you can see, here’s some judgement and estimates involved. Management should really incorporate all available information in their estimates and they must not forget about:
- Risks and uncertainties (like inflation),
- Time value of money (discounting when the settlement is expected in the long-term future)
- Some probable future events, etc.
There are 2 basic methods of measuring a provision:
- Expected value method: You would use this method when you have a range of possible outcomes or you measure the provision for large amount of items. In this case, you need to weight each outcome by its probability (for example, warranty repair costs for 10 000 products).
- The most likely outcome: This method is suitable in the case of a single obligation or just 1 item (for example, provision for loss in the court case).
How to account for a provision?
There are several events associated with the accounting for provisions:
-
- Recognition of a provision: In most cases, you should recognize a provision in profit or loss. Sometimes, a provision is recognized in the cost of another asset, for example, provision for removing the asset and restoring the site after its use.Don’t forget to split the provision in the current and non-current part for the presentation purposes in your statement of financial position.
- Unwinding the discount: When a provision has a long-term nature (beyond 12 months), then there’s some discounting involved as you need to present it in its present value.In each reporting period, you account for an interest on the opening balance of the provision and this is called „unwinding the discount“.Special For You! Have you already checked out the IFRS Kit ? It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out!You should recognize the interest in profit or loss and it also increases the amount of a provision.
- Utilization of a provision: When you incur expenditures associated with the settlement of your obligation, you should „utilize a provision“.In most cases, you simply recognize this utilization directly with incurring the invoices from suppliers or any related payments (e.g. Debit Provision / Credit Cash).
- Reimbursement: Sometimes, entities have right to reimbursement of related expenditures by the third party (e.g. from an insurance company).In this case, a right to reimbursement is recognized as a separate asset (no netting off with the provision itself), but you can net off the expenses for provision with the income from reimbursement in the profit or loss.
Provisions in specific circumstances
Standard IAS 37 specifies the treatment of provisions in a few specific situations:
Future operating losses
You should not make a provision for future operating loss.
Why?
Because there is no past event. The future operating losses can be avoided by some future actions, for example – by selling a business.
However, you should test your assets for impairment under IAS 36 Impairment of Assets.
Onerous contracts
Onerous contract is a contract in which unavoidable costs of fulfilling exceed the benefits from the contract.
In other words, it is a loss contract that cannot be avoided.
You should make a provision in the amount lower of:
- Unavoidable costs of fulfilling the contract and
- Penalty for not meeting your obligations from the contract
Restructuring
Restructuring is a plan of management to change the scope of business or a manner of conducting a business.
You should recognize a provision for restructuring only when the general criteria for recognizing provisions are met.
In the case of restructuring, an obligation to restructure arises only if:
- There is a detailed formal plan for restructuring with relevant information in it (about business, location, employees, time schedule and expenditures)
- A valid expectation related to restructuring has been raised in the affected parties.
IAS 37 also clarifies which type of expenses can / cannot be included in the provision.
What are contingencies?
Except for provisions, we can deal both with contingent liabilities and contingent assets.
Contingent liabilities
A contingent liability is either:
- A possible obligation (not present) from past event that will be confirmed by some future event; or
- A present obligation from past event, but either:
- The ouflow of economic benefits to satisfy this obligation is not probable (less than 50%), or
- The amount of obligation cannot be reliably measured (this is very rare, in fact).
For example, you might face a lawsuit, but your lawyers estimate the probability of losing the case at 30% – in this case, it’s not probable that you will have to incur any expenditures to settle the claim and you should not book a provision. It’s typical contingent liability.
If you identify you have a contingent liability, you do NOT recognize it – no journal entry. You should only make appropriate disclosures in the notes to the financial statements.
Contingent assets
A contingent asset is a possible asset arising from past events that will be confirmed by some future events not fully under the entity’s control.
Similarly as with contingent liabilities, you should not book anything in relation to contingent assets, but you make appropriate disclosures.
Provisions and further specific guidance
Standard IAS 37 gives further guidance for certain situations in its appendix and also, several interpretations clarify the accounting for provisions in some specific cases:
- IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities deals with the provision for removing the asset and restoring the site after the end of its useful life;
- IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds is related to IFRIC 1 and it applies when a company contributes to a fund for reimbursement of these expenses.
- IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment: this IFRIC specifies when the producers of electrical and similar appliances sold to household are liable for decommissioning of electrical waste
- IFRIC 17 Distributions of Non-cash Assets to Owners
- IFRIC 21 Levies
Here’s the list of articles published on CPDbox related to the standard IAS 37:
- How to account for decommissioning provision under IFRS
- Practical questions about accounting for provisions
You can watch a video with IAS 37 here:
If you liked this article or you have anything to say, please leave a comment below this video and share, thank you!
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136 Comments
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Dear Silvia,
if a company does not fulfill the legal requirements for certain restoration expected to be full filled in that year, should we make a provision for the difference? The restoration is performed by the companies employees.
Thanks!
Hi Jane, if there is a present obligation and you cannot avoid either restoration expenses or penalty for breaching the rules, then yes. S.
Hi silvia, what should be the treatment of the legal expense in the ias 37? is it be treated as expense in SOPL or treated as a part of the provision???
Hi Anurag,
it really depends on the substance of that legal expense – there is no definite answer without assessing it why it arose. S.
Hi SIlvia,
My company is an investor that develops a retail center (it is IP under construction a the moment). The company employed third party to lease the property. At the moment it is 70% lease and there is one year left to the opening of the center.
We pay leasing fee and additioanlly the parties agreed to pay contingent fee – “reward” for the company providiong leasing services in case the retunrn on investment (income / market value) exeeds certain percent in one year time after opening. Based on the lease agreements concluded so far there is high probablity that we will be obliged to pay extra fee (as lease agreements were concluded on favourable terms).
The question is: shuld we already account for the provision for extra fee or wait till one year after opening?
Thank you in advance!
Hi Kim,
this is a contingent consideration and in my opinion yes, you should include its estimate in the year when the services were provided as soon as it is probable and the reliable estimate of the amount can be made (I guess you still follow IAS 17 and this is an operating lease). S.
Dear Silvia,
I have a doubt regarding Provision for leave encashment booking . books are closed on 31 december say december ,2017 . as per company policy employee can carry forward balance leave up to 2 years ,while preparing balance sheet for the year 2017, we need to account provison for leave encashment . salary increment is done on January every year . my question is which years salary we should use for remaining leave balance amount calculation . December 2017 salary or next year January salary (New Salary-2018) .
Hi Silvia,
Can you please clarify whether it is possible to recognize a liability based on purchase orders?
A company has raised a purchase order to purchase production materials and they have recognized a liability based on the purchase order. They have not yet received an invoice from the supplier and materials have not been received yet.
Dear Fahim,
no, purchase order does not create any liability. S.
Hi Silvia, could you pls further clarify on why purchase order does not create liability as the same are legal documents and we have obligation to abide by PO Terms. We cannot cancel PO through any future actions.
Also could you pl advise if non refundable advance for a service creates a present obligation?
ACCA exam answers refer to executory contracts and says in such cases no liability is to be created unless they are onerous. Can you please explain this. Onerous part is already clear above. Some examples will be useful.
hello Silvia,
I would love to start my ACCA course..please kindly advise on how to go about it.( i had a BSc degree in Accounting).please i would appreciate you advise
Hello Silvia,
I reqeust you to please clarify the difference between IAS-10 ‘Events occuring after Balance sheet date’ and IAS-37 ‘Provisions, Contingent liability and Contingent Assets’ , especially on the point of Provision.
Hi Diksha,
you create the provision under IAS 37 due to some past event that occurred in the past and it was known at the time of preparing the financial statements. Adjusting event under IAS 10 occurs AFTER the end of the reporting period and it merely provides an evidence of conditions that existed at the year-end. S.
Hello Silvia,
Thank you for explaining the difference so accurately .
I was also solving Diploma in IFRS ACCA exam questions .In most of the questions pertaining to IAS-37( December2014 and December2011 – Question 2) , they have also given reference to IAS-10. I request you to please clarify as to what is the need of giving such a reference.
Dear Diksha,
I think it’s better to look at official ACCA’s answers to these papers – they are published on their website, too. The reason is that you will see specifically what they want you to write. S.
Hello Silvia ,
Please i got litigation as result of credit facility giving to someone who refuse to pay.I believe this is treated as contingency asset.However,cost arising such as amount paid to my lawyer should be treated as what please?
Hi Ayo, you need to expense them in profit or loss, I’m sorry.
Thanks Silvia
Hi
I have across a situation related events after reporting period and contingent asset. Company had filed law suit against supplier during the year and after reporting law suit judgement came favourable to company and collected cash . This happens before finalisation of audit report (say year end is 31 dec, judgment and cash collection occurred in March – audit report to be provided by April )
Is this an adjusting event ?
Can we recognise contigent asset or only we should disclose this ?
hello guys i need help with these example of Provisions and IAS37
Trinity active limited comprise a chain of elite south africa Gym. their target market is theyouth in their mid 30s, who are looking for class gym experience.Due to the pressure from health and safety activits, the sount africa helth and safety legislators have put fowrad to parliament an amandment to the health and safety regulations that required to comply with by all circulating system.
the new legislation was accepted and announced to all gym owners on 31 october 2015, it required all gym owners to have these air conditioning and circulation systems by 31 ocober 2016 if a gym does not comply with this legislation a fine may be impossed based on the size of the gym
the board of directors of thrinity decision not to fit these new ir-conditioafter a year thning systemsas they belived that tehy had done the jobe sufficiently alredy.
requiment
the Trinity has a present obligation from past obligation at 31 december 2015
or has the presentobligation from past oblifation event at 31 december 2016
Hello Thanks Madam Silvia for this great article about IAS 37.
An highlight on a situation where a transportation company has:
A fleet of vehicles and a new transport regulation has been passed requiring the transportation company’s vehicle to undergo a compulsory roadworthy inspection on an annual basis at a fee of $ 128,000.
Does a provision exist in this case?
Where the same company has a policy of undertaking painting all pedestrian crossing points on all its routes in the major trading towns. This has been honoured for the last 10 years costing 1 million on average annually.
Can I recognize provisios for these two scenarios.
Thanks madam, I will be glad to hear from you.
Hi, Kapala,
in the first case – you should make a provision in the amount of estimated cost of inspection, and debit it to the cost of assets (not P/L). These capitalized costs should be depreciated over the period until the next inspection.
2nd case – it seems like a constructive obligation and therefore, it’s probable that you need to make a provision. But, this requires careful assessment. S.
Thank you for the great explanation.
I think you are the greatest accountant ever ^^
Far from that, but thanks 🙂
Thank you for this summary
How would a provision recognized in a previous year be reversed in the current year if the FS in the previous has been approved and published.
A. Would it be reversed as an income from previous year in the the current FS.
b. Would it be credited to the expense account for which the provision was made to in the previous year
IAS 37 did not give a clear indication of this situation.
Hi Mohafed,
if the provision is cancelled because no relevant expenditure was made, then I would present it as a credit to expense account clearly stating why the provision was cancelled. However, if the amount is material (significant), then you should present it separately. But if you incurred the expenditure that the provision was made for, then the provision is derecognized against cash paid (liability incurred). S.
So should it be cleared off against same expense that was originally taken? or to other operating income? Thanks
The is an incredible site for learning IFRS.
Hi Silvia,
Regarding the onerous contracts, we are supposed to:
Make a provision in the amount lower of:
-Unavoidable costs of fulfilling the contract and
-Penalty for not meeting your obligations from the contract
What if the 2nd case is the lower amount but the company wishes to fulfill the contract due to reputation etc.?
Thank you.
Hi, what is the double entry if i wanted to create a provision to release over several years into the P&L? Do I Credit Provision (liability) Debit ???
It depends what it relates to. Is it for the removal of some asset? Then it’s Debit Asset Credit Liability. Is it to rectify some damages? Then it’s Debit P/L Credit Liability. S.
Hi Silvia
I have a question, if company A has two lawsuits against Company B, one is as claimer and the other one is as defendant. How to estimate the provision?
Thank you very much
Dear Sveta,
it pretty much depends on the circumstances and whether the result of 1 case is dependent on another case. But in general – if A is a defendant, then you must assess the probability of losing the case and estimate the financial outcome and possibly account for a provision (or disclose contingent liability).
If A is a claimer, then there is possibly a contingent asset. But you should not really offset these 2 cases, but treat them as 2 cases.
Hi Silvia
In a Tax computation, are provisions are allowed as a deduction?
Dear Portia,
it purely depends on your own tax legislation… some of them might be permitted as tax-deductible and some of them not. S.
Hi! I want to ask a question about provision In relation to a failed acquisition, the entitywas charged 300, 000 then they paid 200, 000 for the full settlement of the debt and will no longer pay any outstanding balance as they state that it was a reasonable sum for the debt. What would be the implication of this and its effects in their financial statements? Thank You and God Bless you!
Hi Silvia. May I trouble you for your opinion on the following:
A company was subject to a VAT investigation in August and subsequently fined $1m, due 15/09/2016. The company will contest this decision in court and expects (i.e. greater than 50%) to have the decision reversed.
Is this a provision or contingent liability at 31/08?
I am in doubt mainly because the penalty has been decreed by the VAT authorities. Therefore does this fact override the company’s expectation of a reversal of the decision?
Thanks!
Hi Sylvia Good day
The company enter to an aggreement( Fees/expenses are determinable) in Aug 2016 with a consulting firm to provide services in Feb 2017, the company will pay an advance payment in january 2017, my question is do i need to disclose the event on the 2016 Financial Statement? or do nothing
please i need your opinion
Godbless
Dear Zarah,
you do nothing (if the contract is not onerous and is at commercial terms). I suppose the services will be provided in February, therefore it’s an event of 2016. S.
If a society record income on cash basis and society indulged in law suite , when society record contigent income .
either any entity apply accrual and cash basis accounting simultaneously
Hello Dear Silvia.
I purchased your training for IFRS but I have doubt in regards to IAS 37 in the example you provide in sheet 7-IFRIC1. When looking at others’ examples and reading carefully the standard, it is supposed you should recognize initially the NPV of such decomissioning cost and not the future one. In your example you recognize fully at the beginning 445,59 but it looks like it should have been 350 and then annually adjust the provision to finally get to 445,59.
Please see https://www.consultasifrs.com/adjuntos/en_biblioteca_129.pdf page number 14.
Kindly let me know if I am confused somewhere because after reading many times the standard it says you have to provision if financial impact is important using the net present value and what you are using is the future value.
Thanks
Dear Jose,
I think there is a little misunderstanding. Yes, you are fully right that the provision must be recognized in its present value and not in the “future costs”.
But, in the example from the IFRS Kit, please note the following:
– CU 350 is an estimate of all costs in the current year’s prices. But, the prices will be different in the future when the costs will be incurred and it is therefore necessary to adjust 350 by the inflation and other estimates. That’s in the column “inflated costs”, the total amount is 728.10 (column F; please make up a total). And then, 728.10 is discounted to present value by the appropriate discount rate and it gives you 445.59.
I hope it’s clearer now!
Kind regards, S.
In re-imbursement 1: Dr Ptovision Exp Cr.Provion Liability,
Reimbursement Entry 2: Dr. Re-imbursement Asset Cr.Provision Income,
When Reimbursement Received 3: Dr.Cash Cr.Reimbursement
end entry 4: Dr.Provision Liability Cr.Cash
Am I right?
Yes, can be that way. S.
I am not sure about entry 4?
Won’t this entry then not reflect the cash (Dr) even though you have the money in the bank?
to make sense of this whole reimbursement
Dear Sylvia,
how to account for Withheld payments on long-term contract?
Thanks!
Dear Sylvia,
should a company recognize a late payment interest provision?
Thank you very much in advance,
kind regards!
Jane, in general – if you meet all 3 criteria for provisions, then yes. In my opinion – there is a past even (late payment), but is there really a probability that you will be charged? Can you avoid it? S.
Waoooo!!! So succinct .
very informative and well explained
Dear Sylvia,
how to account for the following situation:
based on the wrong calculation in relation to litigation claims, the company charged litigation provisions in the year 1 with an amount which was to low in relation to the actual claim in year t +3 . Should the Company correct the misstatement in accordance with IAS 8, or just recognize the expenses in year t+3, as the expenses of the reporting year?
Kind regards!
Hi Jane,
it depends on whether the information for the correct calculation of a provision was known in the year 1 or not. If not, and it was just the best estimate, then I’m afraid no, you should not correct the past. But if yes and you really revealed an error in calculation, then based on its materiality it would be appropriate to correct error in line with IAS 8. S.
Hi Silvia,
How do you account for end of service gratuity provision? should it be current or non-current. the timing is uncertain but it is probabale, and there’s a local legislation for its payment making it unavoidable too. My problem comes in classifying whether it should be current or non current liability, since the timing of the employees resignation or termination cannot be foreseen. Is there a silent rule on this?
Hi Cami,
The end of service gratuity provision is recorded as non-current liability due to its long term nature. Furthermore, usually the employee is entitled to EOSB after completing 1 or more years of service/ employment.
Hi Silvia, I have a financial reporting exam in Dec. Would you please sit for it and write my name. I will be very grateful.
😀 😀 😀 Nice one!
Good luck 🙂
Thanks Silvia to you for simply definition..otherwise I couldn’t understand))) thank you very much
Thank you for the explanation Silvia. Kindly look into this arrangement:
A Company arranges a financial instrument (called a Commercial Papers – CP) with the following features:
A borrower (CP Issuer) gives the Company (CP Arranger) the mandate to arrange a CP on its behalf;
The Company (CP Arranger) seeks for buyers (CP Investors) of the mandate, who are willing to invest in the CP;
CP Arranger receives the funds from the CP Investor;
CP Arranger charges the arrangement fee and interest upfront and discount it from the face value of the CP;
CP Arranger then disburses the net proceeds (after discounting the upfront fees and interest) to the CP Issuer;
CP Arranger also pays the CP Investor interest upfront;
At maturity, CP Issuer repays the face value to the CP Arranger, and the Arranger in turn pays the Investor;
CP Investor is aware that the borrowing is by the CP Issuer, but both will never have any contact or contract at any stage of the transaction;
CP Arranger repays the CP Investor should the CP Issuer defaults at maturity.
Now my question:
Can this transaction be treated under IAS 37 in the books of the CP Arranger as a Contingent Liability? If no, what is/are the relevant Standard(s).
Thanks.
Thank you again for your clear approach on IAS 37.
I have some question, why IAS 37 problems in measurement continue to exist ?
Thank you.
This is such a broad question… can you specify what problems?
Thank you Silvia for this brilliant approach to IFRS.
With regard to a provision for dilapidations cost (due to terms in property leases that put lessee under an obligation to make good dilapidations): –
1. It is not clear in IAS 37, if we should recognise the expected dilapidations by way of provision immediately upon signing the lease, or if it can be build up over the period of the lease.
2. The provision should be accounted for up till the break option point (rather than till the end of lease term)?
3. Is it correct that if dilapidations liability assessments are commissioned, the dilapidations cost – amount of which is likely to be certain – will be an accrual rather than a provision, even though the(repair/rebuilding/renewing/decorating etc)services have not been received and will only be carried out upon exit of the building? Referring to IAS 37 para 11
Appreciate your insights. Thanks once again.
Hi Airene,
please, what is “dilapidations”? Is it removing the asset and bringing the site or asset into the original condition? In any case:
1. The provision should be recognized at the moment when there is a present obligation arising from past event. In this case, I would say to recognize it all immediately, because your obligation arose at the moment of taking the lease.
2. What do you mean by “break option point”? It should be accounted at once and then updated annually for some changes in estimates.
3. Well, it depends on when we look at it. However, accrual has a short-term character, while this seems long-term issue, so I would call it a provision.
S.
Good Response Silvia. Thank You for the services that You have been rendering to the Accounting & FIN. community. It’s just truly remarkable. Thank You again.
Hello Ma’am Silvia.
I have a question regarding contingencies. I am working in of one of the company and they had a contingency of round about two million. they imported the plant and machinery in year 2006 and the custom charges were understated at the time of clearing on port. the custom department sued the company for settling less charges against the import of machinery. Finally the court gave the decision in favor of the custom department and the company was held liable to pay two million remaining custom charges and further the company was held liable to pay two hundred thousand as a fine.
US Dollar($)
Remaining custom charges=2,000,000
Penalty(Fine) = 200,000
Total amount payable =2,200,000
In total $ 2.2 million.
So how should i account for the amount stated above?
Should i capitalize my asset by $ 2.2 millon or by $ 2 million dollar and expense out the penalty charges by $ 200,000.
Please guide me if any other accounting adjustment is to be made.
Anxiously waiting for your reply Ma’am Silvia.
Hi Usama, well, USD 2 mil. relates directly to the acquisition of PPE and the penalty relates to not complying / breaching the import conditions – in my opinion, these 200 000 were not spend as necessary cost to bring the asset to its desired condition and location, so I would expense it at the time of court’s decision. S.
Hi Silvia,
I’m kinda confused between accrual and provision. If for example i need to account for utilities expenses but since the amount are vary each month, does it called provision or accrual due to uncertain amount to estimate?
As always an excellent article!
Hi Silvia, Thank you very much for this. I have one small question.
In the case of reimbursements, if you have already made a provision (i.e. Debit – expense, credit – liability)and are expecting part of this expense to be reimbursed (credit – expense, debit – reimbursement asset) wouldn’t this mean that the liability created in the first place (for the portion of the expense that was reimbursed) would remain in the balance sheet even after reimbursement and may never be extinguished?
I am probably missing something big here,
Thanks again,
Fawas
Hi Fawas,
when the reimbursement is actually made, you account for Debit Cash Credit Reimb. Asset. Once you make a payment from this reimbursement, then you account for Debit Provision Credit Cash – this is the case of 2 separate payments (1 to you from reimbursement and 1 from you to settle the liability).
Sometimes, reimbursements are paid directly to the entity to which you are liable. E.g. when you caused an accident and damage to someone else, and you are insured against third party liability, then an insurance company can pay the claim instead of you directly to the damaged entity and in this case, you only get the announcement that the claim is paid. You account Debit Liability Credit Reimb. asset. Hope it’s clear! S.
Crystal clear..
Many thanks 🙂
Hi: Silvia M
I want to ask ypu that what are the accounting requirements of provisions contained in IAS37 and why there is a need for accounting standard in this area
please answer this briefly that iam clear about IAS37
Thanks
Thanks for spreading the light.
wow great work
Thank You Silvia for this outstanding lesson on IAS 37. We really appreciate.
Does the standards allow one to make a provision for expected credit notes which are yet to be received from the supplier?
Hi Joseph,
that would probably be an accrual rather than a provision, as the timing / amount are virtually known (as opposed to the situations when you make a provision). S.
We have accumulated a provision in our accounts for a liability which now has been estimated that we no longer will be paying the full amount. the Management now wants to reverse the full accumulated provision so far. Although in paper there exists a liability, it is not expected to be settled. If the provision is reversed and taken as income, what is the treatment in the notes of accounts(disclosure and value)
I believe no disclosure and value is required in notes to accounts for liabilities written back.
Thank you Silvia. This is more explicit.
I really appreciate what you are doing for us
Awesome…very impressive work
It’s Magic Silvia.Thanx
This is excellent Silvia, this has really refreshed my knowledge on provisions, thanks very much for this wonderful information.
Best site for accountants ever i have seen
Thanks Silvia for superb summary on IAS 37. For discounting the long term provision what is the discount rate to be applied ?
Thats very informative and it makes sense.
Thank you very much Silvia ,i have some queries regadring provision ,now it resolved.