International Accounting Standard 37

• Issued: in 1998; followed by amendments
• Effective date: 1 January 1999
• What it does:
  • It contains definitions of a provision, contingent liability, contingent asset, etc.
  • It gives guidance on distinguishing provisions from other liabilities and on relationship between provisions and contingent liabilities.
  • It deals with recognition of both provisions and contingencies.
  • Provision shall be recognized when the following 3 conditions are met:
    1. An entity has a present obligation as a result of past event;
    2. Outflow of economic benefits to settle the obligation is probable; and
    3. Reliable estimate of the amount of obligation can be made.
  • Contingent liabilities and contingent assets shall not be recognized.
  • IAS 37 sets rules for measurement of provisions and discusses several factors to take into account in reaching the best estimate of provision:
    • Risk and uncertainties,
    • Present value,
    • Future events,
    • Expected disposals of assets.
  • Standard also deals with reimbursements of provisions by another party, changes in provisions and use of provisions.
  • It establishes application rules for recognition and measurement of 3 specific cases:
    1. Future operating losses;
    2. Onerous contracts; and
    3. Restructuring.
  • Number of disclosures is required.
  • In its appendices, standard summarizes main requirements of the standard in a transparent table, decision tree, examples of recognition and disclosures.

• Summary of IAS 37 Provisions, Contingent Liabilities and Contingent Assets
• How to account for decommissioning provision under IFRS
• Practical questions about accounting for provisions

• How to present the financial statements when going concern does NOT apply? – this topic is very closely related to IAS 37.
• Should we create a provision for major overhauling?
• When to recognize a warranty provision – over a warranty period? In the year of sale? Why?
• Expenses for remediation of environmental damage – should you create a provision and capitalize?
• Decrease in decommissioning provision results in negative asset – should we show the negative net book value in our PPE related to the power plant?
• Provision based on a budget or orders – should we make a provision for expenses based on budget?
• Difference between provision and actual expenses – should we restate the financial statements for the previous period?

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