Environmental provisions – general guidance in IAS 37 ............................ 1931
6.5 Liabilities
associated
with
emissions trading schemes ................................ 1932
6.6
Green certificates compared to emissions trading schemes ...................... 1934
6.7
EU Directive on ‘Waste Electrical and Electronic Equipment’
(IFRIC 6) ............................................................................................................... 1935
6.8
Levies imposed by governments ..................................................................... 1936
6.8.1
Scope of IFRIC 21 ............................................................................... 1937
6.8.2 Recognition
and
measurement of levy liabilities ......................... 1938
6.8.3
Recognition of an asset or expense when a levy is
recorded .............................................................................................. 1940
6.8.4
Payments relating to taxes other than income tax ....................... 1941
6.9
Dilapidation and other provisions relating to leased assets ....................... 1942
6.10 Warranty provisions ........................................................................................... 1944
6.11 Litigation and other legal claims ...................................................................... 1945
1866 Chapter 27
6.12 Refunds
policy ..................................................................................................... 1946
6.13 Self
insurance
......................................................................................................
1946
6.14 Obligations to make donations to non-profit organisations ...................... 1947
6.15 Settlement
payments
.......................................................................................... 1949
7 DISCLOSURE REQUIREMENTS ................................................................... 1949
7.1
Provisions ............................................................................................................. 1949
7.2 Contingent
liabilities
..........................................................................................
1952
7.3 Contingent
assets
................................................................................................
1953
7.4
Reduced disclosure when information is seriously prejudicial ................. 1954
List of examples
Example 27.1:
Recognising a provision because of a constructive
obligation .............................................................................................. 1878
Example 27.2:
No provision without a past obligating event ............................... 1879
Example 27.3:
Obligations must exist independently of an entity’s future
actions ................................................................................................... 1879
Example 27.4:
When the likelihood of an outflow of benefits becomes
probable ................................................................................................ 1883
Example 27.5:
When the recognition of a provision gives rise to an asset ........ 1886
Example 27.6:
Calculation of expected value.......................................................... 1887
Example 27.7:
Calculation of a risk-adjusted rate .................................................. 1889
Example 27.8:
Use of discounting and tax effect .................................................... 1892
Example 27.9:
Effect on future profits of choosing a real or nominal
discount rate ........................................................................................ 1893
Example 27.10:
Effect on future profits of choosing a risk-free or risk-
adjusted rate ......................................................................................... 1894
Example 27.11:
Accounting for the effect of changes in the discount rate ......... 1896
Example 27.12:
Prohibition on maintenance provisions relating to owned
assets ..................................................................................................... 1901
Example 27.13:
The effect of timing of the creation of a constructive
obligation on the recognition of a restructuring provision ........ 1907
Example 27.14:
Distinguishing restructuring costs from ongoing expenses ....... 1909
Example 27.15:
Onerous supply contract ................................................................... 1912
Example 27.16:
Onerous contract with several ‘over time’ performance
obligations that are satisfied consecutively ................................... 1918
Example 27.17:
Changes in decommissioning costs – related asset
measured at cost ................................................................................. 1922
Example 27.18:
Changes in decommissioning costs – related asset carried
at revaluation amount ........................................................................ 1923
Example 27.19:
Illustration of IFRIC 6 requirements .............................................. 1936
Provisions, contingent liabilities and contingent assets 1867
Example 27.20:
A levy is triggered in full as soon as the entity generates
revenues ............................................................................................... 1938
Example 27.21:
Recognising a liability for levies that are triggered
progressively ....................................................................................... 1940
Example 27.22:
Recognition of a provision for warranty costs ............................. 1944
Example 27.23:
Accounting for donations to non-profit organisations ............... 1947
Example 27.24:
Reduced disclosure when information is seriously
prejudicial ............................................................................................. 1954
1868 Chapter 27
1869
Chapter 27
Provisions,
contingent liabilities
and contingent assets
1 INTRODUCTION
1.1 Background
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – applies to all
provisions, contingent liabilities and contingent assets, except those relating to
executory contracts that are not onerous and those provisions covered by another
Standard. [IAS 37.1].
For some time the IASB has considered amending IAS 37 and an exposure draft was issued
in June 2005. Subsequent deliberation, including round-table meetings held with
constituents to discuss their views, resulted in the Board revising its proposals and issuing a
second exposure draft in January 2010. However, IAS 37 was not revised. Instead, in 2010,
the Board suspended the project to allow it to focus on higher priority projects, and pending
completion of its project to revise the Conceptual Framework. The IASB again began
discussions on a Provisions, Contingent Liabilities and Contingent Assets research project
in 2015. The IASB has now completed its discussions of the staff’s initial research. The
project has been moved from the active research programme to the research pipeline, and
its title has been shortened from ‘Provisions, Contingent Liabilities and Contingent Assets’
to ‘Provisions’ to more faithfully depict the main focus of the research carried out.1
1.2
Interpretations related to the application of IAS 37
The Interpretations Committee has issued a number of pronouncements relating to the
application of IAS 37 (although one of them was subsequently withdrawn).
1.2.1 IFRIC
1
IFRIC 1 – Changes in Existing Decommissioning, Restoration and Similar Liabilities –
provides guidance on how to account for the effect of changes in the measurement of
existing provisions for obligations to dismantle, remove or restore items of property,
plant and equipment. This is discussed at 6.3 below.
1870 Chapter 27
1.2.2 IFRIC
3
Another issue considered by the Interpretations Committee was how to account for a
‘cap and trade’ emission rights scheme. In December 2004, the Interpretations
Committee issued IFRIC 3 – Emission Rights – but this was later withdrawn in June
2005. This interpretation, inter alia, required that as emissions are made, a liability was
to be recognised for the obligation to deliver allowances equal to the emissions that had
been made by the entity. Such a liability was a provision within the scope of IAS 37, and
was to be measured at the present market value of the number of allowances required
to cover emissions made up to the end of the reporting period. Accounting for liabilities
associated with emissions trading schemes is discussed at 6.5 below.
1.2.3 IFRIC
5
IFRIC 5 – Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds – deals with the accounting by an entity when it
participates in a ‘decommissioning fund’, the purpose of which is to segregate assets to
fund some or all of the costs of its decommissioning or environmental liabilities for
which it has to make a provision under IAS 37. This is discussed at 6.3.3 below.
1.2.4 IFRIC
6
IFRIC 6 – Liabilities arising from Participating in a Specific Market – Waste Electrical
and Electronic Equipment – provides guidance on the accounting for liabilities for
waste management costs. This clarifies when certain producers of electrical goods will
need to recognise a liability for the cost of waste management relating to the
decommissioning of waste electrical and electronic equipment (historical waste)
supplied to private households. This is discussed at 6.7 below.
1.2.5 IFRIC
21
IFRIC 21 – Levies – addresses the recognition of a liability to pay a levy imposed by
government if that liability is within the scope of IAS 37. It also addresses the accounting
for a liability to pay a levy whose timing and amount is certain (see 6.8 below).
Although they are not interpretations of the standard as such, the IAS 37 guidance on
non-financial liabilities is also referred to in IFRIC 12 – Service Concession
Arrangements (see Chapter 26); and IFRIC 14 – IAS 19 – The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their Interaction (see Chapter 31).
1.3
Terms used in this chapter
The following terms are used in this chapter with the meanings specified:
Term Definition
Provision
A liability of uncertain timing or amount. [IAS 37.10].
Liability
A present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources
embodying economic benefits. [IAS 37.10].
Obligating event
An event that creates a legal or constructive obligation that results in an
entity having no realistic alternative to settling that obligation. [IAS 37.10].
Provisions, contingent liabilities and contingent assets 1871
Legal obligation
An obligation that derives from a contract (through its explicit or implicit
terms); legislation; or other operation of law. [IAS 37.10].
Constructive obligation
An obligation that derives from an entity’s actions where:
(a) by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of
those other parties that it will discharge those responsibilities.
[IAS 37.10].
Contingent liability
(a) a possible obligation that arises from past events and whose existence
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; or
(b) a present obligation that arises from past events but is not recognised
because:
(i) it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient
reliability. [IAS 37.10].
Contingent asset
A possible asset that arises from past events and whose existence 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.
[IAS 37.10].
Onerous contract
A contract in which the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received under it.
[IAS 37.10].
Restructuring
A programme that is planned and controlled by management, and
materially changes either:
(a) the scope of a business undertaken by an entity; or
(b) the manner in which that business is conducted. [IAS 37.10].
Executory contract
A contract under which neither party has performed any of its obligations
or both parties have partially performed their obligations to an equal extent.
[IAS 37.3].
Levy
An outflow of resources embodying economic benefits that is imposed by
governments on entities in accordance with legislation (i.e. laws and or
regulations), other than:
(a) those outflows of resources that are within the scope of other
Standards (such as income taxes that are within the scope of IAS 12);
and
(b) fines or other penalties that are imposed for breaches of the legislation.
[IFRIC 21.4].
Government
Refers to government, government agencies and similar bodies whether
local, national or international. [IFRIC 21.4].
1872 Chapter 27
2
OB
JECTIVE AND SCOPE OF IAS 37
2.1 Objective
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 enable users to understand
their nature, timing and amount’. [IAS 37 Objective].
2.2
Scope of IAS 37
The standard is required to be applied by all entities in accounting for provisions,
contingent liabilities and contingent assets, except those arising from executory
contracts (unless the contract is onerous) and those covered by another
standard. [IAS 37.1].
The following table lists the specific types of transaction or circumstances referred to
in the standard that might give rise to a provision, contingent liability or contingent asset.
In some cases, the transaction is identified in IAS 37 only to prohibit recognition of any
liability, such as for future operating losses and repairs and maintenance of owned assets
(see 5 below). This chapter does not address those items identified below as falling
outside the scope of the standard.
In
Out of Another
Types of transaction or circumstances referred to
scope scope standard
Restructuring costs
•
Environmental penalties or clean-up costs
•
Decommissioning costs
•
Product warranties / refunds
•
Legal claims
•
Reimbursement rights
•
Future operating costs (training, relocation, etc.)
•
Future operating losses
•
Onerous contracts (including onerous contracts under IFRS 15)
•
Repairs and maintenance costs
•
Provisions for depreciation, impairment or doubtful debts
•
IAS 16 /
IAS 38 /
IAS 36 /
IFRS 9
Executory contracts (unless onerous)
•
Income taxes
•
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 368