IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

3 /8

Wiley lFRS: Practical Implementation Guide and Workbook

(b) A present obligation that arises from past events but is not recognized because either it is not possible to meas ure the amount of the obligation with sufficient reliability or it is not probable that an outflow of resources will be required to settle the obligatio n. Contingent asset. A possible asset arising from past event s and whose existence will be con– firmed only by the occurrence or nonoccurrence of one or more uncertain future events that are not comp letely within the control of the entity. Executory contract. A contract under which neither party (to the contract) has performed its obliga tions or both the parties (to the contract ) have performed their obligations partially to an equal extent. Onerous contract. A con tract in which the unavoidable costs of meeting the obligations un– der the contract excee d the eco nomic benefits expected to be received under the contract. Restructuring. A program that is planned and controlled by the management and materially changes either the scope of a business undertaking by an entity or the manner in which that business is conducted. 4.1.1 Those liabilities that are of uncertain timing or amount are "p rovisions," according to the Standard. Creditors (trade payables) and accrued expense s are therefore not considered "provi– sions" by this Standard because they do not meet the above criteria . Similarly, as explained , the term "provision" is used in some countries in the context of "depreciation" and "doubtful debts," but these are not the type of provisions that are envisaged by this Standard. 4.1.2 Provisions should be recognized if, and only if, all of these conditions are met: (a) An entity has a present obligation resulting from a past eve nt; (b) It is probable that an outflow of resources embodying eco nomic benefits would be required to settle the obligatio n; and (c) A reliable estimate can be made of the amount of the obligat ion. 4.1.3 Not all obligations would make it incumbent upon an entity to recognize a provision . Only present obligations resulting for a pa st obligating event give rise to a provision . 4.1.4 An obligation could either be a legal obligation or a constructive obligation. 4.1.5 A legal obligation is an obligation that could (a) Be contractual; or (b) Arise due to a legislation; or (c) Result from other operation of law. 4.1.6 A constructive obligation, however, is an obligation that results from an entity's actions where (a) By an establi shed pattern of past practice, publi shed policies, or a sufficiently specific cur– rent statement, the entity has indicated to other (third) parties that it will accept certain re– sponsibilities; and (b) As a result , the entity has crea ted a valid expectation in the minds of those parties that it will discharge those responsibiliti es. 4.1.7 It should be "probable that the outflow of resources embodying economic benefits would occ ur." The term "probable" is interpreted, for the purposes of this Standard, as "more likely than not" (i.e., the chances of occurrence are more than 50%). 4. PROVISIONS 4.1 Recognition of Provisions

Case Study 1

Facts Excellent Inc. is an oil entity that is exploring oil off the shores of Excessoil Islands. It has employed oil exploration experts from around the globe. Despite all efforts, there is a major oil spill that has grabbed