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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. PROVISIONS
4.1 Recognition of Provisions
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%).
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