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PROVISIONS, CONTINGENT LIABILITIES,
AND CONTINGENT ASSETS (lAS 37)
1. BACKGROUND AND INTRODUCTION
1.1
Th is Standard prescribes rules regarding the recog nition and measurement of provision s,
co ntingent liabilit ies, and continge nt asse ts and also mandates disclosures in foo tno tes that would
enable users of financial statements to comprehe nd their natu re, timi ng, and amount.
1.2 Prior to the promu lgation of lAS 37, in the absence of clear-cut rules of recognition and
measurement , entities cou ld charge huge provisions to the income sta tement (often refe rred to as
big bath provisions) and thereby manipulate earni ngs or financial performan ce.
1.3
It
is wort h noting that previously the term "provis ions" was used very loosely in financial
reporting. With the enactment of lAS 37, rules with respect to recog nition and measurement of
provisions, contingent liabilities, and contingent asse ts have been codified. Since then , entities
preparing financial statements in acco rdance with International Financial Report ing Standards
(IFRS) used these terms strictly based on their prescribed definitions under lAS 37. Furthermore,
lAS 37 also has clarified certain misconcept ions about the term "provision." For instance,
"provisions" that are envisio ned by this Standard are now "liab ilities" (of uncert ain timing or
amount). The "provision for depreciation" and the "provision for do ubtful deb ts" are really not
provisions accord ing to this Standard but are contra accounts or adjustments to the carrying value
of asse ts.
2. SCOPE
2.1 The requirements of lAS 37 are applicable
to
recog nition and meas urement of all provisions,
contingent liabilities, and contingent asse ts
except
(a) Those resulting from executory contract s, other than onero us contrac ts
(b) Those cove red by other Standa rds
2.2 In other words, when pro visions, contingent liabilitie s, and co ntingent assets are specifically
addressed by other Standards, then they are not within the scope of this Standard . Standards that
specifically deal with provisions that are not covered by lAS 37 are
• Construction contracts (lAS I I )
• Income taxes (lAS
12)
• Leases (lAS 17) (However, onero us leases are cove red by lAS 37.)
• Employee benefits (lAS
19)
• Insurance contracts (IFRS 4) (However, lAS 37 still applies to provisions, co ntingent liabili–
ties, and contingent assets of an insure r, other than those arisi ng from its contrac tual obliga–
tions and rights under insurance contrac ts within the scope of IFRS 4.)
2.3 The Standard also does not apply to financial instruments (including guarantees) that are
within the scope ofIAS 39.
3. DEFINITIONS OF KEY TERMS (in acco r dance wit h l AS 37)
Provision. A liability of uncertain timing or amount.
Liability. A presen t obligation of an entity arising from past eve nts, the settlement of which is
expected to result in an outflow of resources embodying eco nomic benefi ts.
Co ntinge nt liability.
(a) A possible obligation arising from past eve nts whose exis tence will be co nfirmed only
by the occurrence or nonoccurrence of one or more uncertain future eve nts that are not
compl etely within the control of the ent ity;
or