IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 29 / Provisions, Contingent Liabilities, and Contingent Assets (lAS 37)

7.2.3 In case a contributor has an obligation to make add itional contribut ions (e.g., in the eve nt of the bankruptcy of another contributor), this obligation is a continge nt liability that is within the sco pe of lAS 37, which shall be disclosed as per disclosure requ irements of lAS 37. 7.3 IFRIC Interpretation 6 7.3 .1 The European Union's Directive on Waste Electrical and Elect ronic Equipment (WE & EE) has given rise to que stions about when the liability for the decommissioning of "WE & EE" shall be recog nized. Thi s Interpretation provides guidance on the recognition of liabilities for was te management under this EU Directive. 7.3.2 IFRIC was asked to determine in the context of the decommissioning of "WE & EE" as to what constitutes the "o bligating eve nt" in accordance with lAS 37. Whether (a) it is "ma nufacture or sale of the histori cal household equipment" or (b) it is " the participation in the market during the measurement period," or (c) it is the " incurrence of costs in the performance of waste management activities" and as per the "consensus" (b) above triggers the "o bliga ting eve nt" under lAS 37 at which point a liability has to be recognized . 8. DISCLOSURES 8.1 Where inflow of economic benefits is probable, an entity should disclose a brief description of the nature of the contingent assets at the balance sheet date and , whe re practicable, an estimate of their financial estimate. 8.2 Where any of the information required above is not disclosed because it is not practicabl e to do so, the fac t should be disclosed . 8.3 In extremely rare circ umstances, when disclosure of any or all the above inform ation is con– sidered to be seriously prejudicial to the position of the entity in a dispute with other parties on the subjec t matte r of the cont ingent asse t, an entity need not disclose the info rmation but should dis– close the genera l nature of the dispute, together with the fact that, and reason why, the information has not been disclosed. Facts A Singapore-based shipping company lost an entire shipload of cargo valued at $5 million on a voyage to Australia. It is. however, covered by an insura nce policy. Acco rding to the report of the surveyor the amount is collecti ble, subjec t to the ded uctib le clause (i.e.• 10% of the claim) in the insurance policy. Be– fore year-e nd. the shipping company rece ived a letter from the insurance company that a check was in the mail for 90% of the claim. The international freight forwarding company that entrusted the shipping company with the delivery of the cargo overseas has filed a lawsuit for $5 million, claimin g the value of the cargo that was lost on high seas, and also consequential damages of $2 million resulting from the delay. Acco rding to the legal counsel of the shipping company, it is probable that the shipping company would have to pay the $5 million, but it is a remote possibility that it would have to pay the additional $2 million cla imed by the international freight forwarding company. since this loss was specifically excl uded in the freight– forwarding contract. Required What provision or disclosure would the shipping company need to make at year -end? Solution The shipping company would need to recogn ize a contingent asset of $4.5 million (the amount that is virtually certain of collection). Also it would need to make a provision for $5 million toward the claim of the international freight forwarding company. Because the probability of the claim of $2 million is re– mote, no provision or disclosure would be needed for that. Case Study 6