Which of the following is not a condition for a contingent liability to exist?
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IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets. Show
Provisions A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers. An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability. A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value. IAS 37 elaborates on the application of the recognition and measurement requirements for three specific cases:
Contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. An example is litigation against the entity when it is uncertain whether the entity has committed an act of wrongdoing and when it is not probable that settlement will be needed. 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. A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes. Contingent assets 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.  Our sites
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The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The key principle established by the Standard is that a provision should be recognised only when there is a liability i.e. a present obligation resulting from past events. The Standard thus aims to ensure that only genuine obligations are dealt with in the financial statements – planned future expenditure, even where authorised by the board of directors or equivalent governing body, is excluded from recognition. ScopeIAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6]
Key definitions [IAS 37.10]Provision: a liability of uncertain timing or amount. Liability:
Contingent liability:
Contingent asset:
Recognition of a provisionAn entity must recognise a provision if, and only if: [IAS 37.14]
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation. [IAS 37.10] A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. [IAS 37.10] A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote. [IAS 37.86] In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote. [IAS 37.15] Measurement of provisionsThe amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. [IAS 37.36] This means:
In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events. [IAS 37.42] If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised should not exceed the amount of the provision. [IAS 37.53] In measuring a provision consider future events as follows:
Remeasurement of provisions [IAS 37.59]
Some examples of provisionsCircumstanceRecognise a provision?Restructuring by sale of an operationOnly when the entity is committed to a sale, i.e. there is a binding sale agreement [IAS 37.78]Restructuring by closure or reorganisationOnly when a detailed form plan is in place and the entity has started to implement the plan, or announced its main features to those affected. A Board decision is insufficient [IAS 37.72, Appendix C, Examples 5A & 5B]WarrantyWhen an obligating event occurs (sale of product with a warranty and probable warranty claims will be made) [Appendix C, Example 1]Land contaminationA provision is recognised as contamination occurs for any legal obligations of clean up, or for constructive obligations if the company's published policy is to clean up even if there is no legal requirement to do so (past event is the contamination and public expectation created by the company's policy) [Appendix C, Examples 2B]Customer refundsRecognise a provision if the entity's established policy is to give refunds (past event is the sale of the product together with the customer's expectation, at time of purchase, that a refund would be available) [Appendix C, Example 4]Offshore oil rig must be removed and sea bed restoredRecognise a provision for removal costs arising from the construction of the the oil rig as it is constructed, and add to the cost of the asset. Obligations arising from the production of oil are recognised as the production occurs [Appendix C, Example 3]Abandoned leasehold, four years to run, no re-letting possibleA provision is recognised for the unavoidable lease payments [Appendix C, Example 8]CPA firm must staff training for recent changes in tax lawNo provision is recognised (there is no obligation to provide the training, recognise a liability if and when the retraining occurs) [Appendix C, Example 7]Major overhaul or repairsNo provision is recognised (no obligation) [Appendix C, Example 11]Onerous (loss-making) contractRecognise a provision [IAS 37.66]Future operating lossesNo provision is recognised (no liability) [IAS 37.63]RestructuringsA restructuring is: [IAS 37.70]
Restructuring provisions should be recognised as follows: [IAS 37.72]
Restructuring provisions should include only direct expenditures necessarily entailed by the restructuring, not costs that associated with the ongoing activities of the entity. [IAS 37.80] What is the debit entry?When a provision (liability) is recognised, the debit entry for a provision is not always an expense. Sometimes the provision may form part of the cost of the asset. Examples: included in the cost of inventories, or an obligation for environmental cleanup when a new mine is opened or an offshore oil rig is installed. [IAS 37.8] Use of provisionsProvisions should only be used for the purpose for which they were originally recognised. They should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision should be reversed. [IAS 37.61] Contingent liabilitiesSince there is common ground as regards liabilities that are uncertain, IAS 37 also deals with contingencies. It requires that entities should not recognise contingent liabilities – but should disclose them, unless the possibility of an outflow of economic resources is remote. [IAS 37.86] Contingent assetsContingent assets should not be recognised – but should be disclosed where an inflow of economic benefits is probable. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. [IAS 37.31-35] What conditions are required for a contingent liability to exist?There is a potential future payment to an outside party orthe impairment of an asset that resulted from an existingcondition;2. There is uncertainty about the amount of the futurepayment or impairment; and3. The outcome will be resolved by some future event orevents.
Which of the following would be considered a contingent liability?What are examples of contingent liability? Pending lawsuits and warranties are common contingent liabilities. Pending lawsuits are considered contingent because the outcome is unknown. A warranty is considered contingent because the number of products that will be returned under a warranty is unknown.
What will a contingency not contain?Answer: A disclosure of future contracts to be performed. reasonably in the notes and remote contingencies can be omitted entirely from financial statements. Potential lawsuits, product warranties and pending investigation are some examples .
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