| INTERNATIONAL ACCOUNTING STANDARD 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS | |
| OBJECTIVE | |
| SCOPE | 1 |
| DEFINITIONS | 10 |
| Provisions and other liabilities | 11 |
| Relationship between provisions and contingent liabilities | 12 |
| RECOGNITION | 14 |
| Provisions | 14 |
| Contingent liabilities | 27 |
| Contingent assets | 31 |
| MEASUREMENT | 36 |
| Best estimate | 36 |
| Risks and uncertainties | 42 |
| Present value | 45 |
| Future events | 48 |
| Expected disposal of assets | 51 |
| REIMBURSEMENTS | 53 |
| CHANGES IN PROVISIONS | 59 |
| USE OF PROVISIONS | 61 |
| APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES | 63 |
| Future operating losses | 63 |
| Onerous contracts | 66 |
| Restructuring | 70 |
| DISCLOSURE | 84 |
| TRANSITIONAL PROVISIONS | 93 |
| EFFECTIVE DATE | 95 |
| Approval by the Board of Onerous Contracts—Cost of Fulfilling a Contract issued in May 2020 | |
FOR THE ACCOMPANYING GUIDANCE LISTED BELOW, SEE PART B OF THIS EDITION
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| IMPLEMENTATION GUIDANCE | |
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
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| BASIS FOR CONCLUSIONS | |
International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) is set out in paragraphs 1–105. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 37 should be read in the context of its objective, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10–12]
The objective of this Standard 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.
1 | This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets, except:
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2 | This Standard does not apply to financial instruments (including guarantees) that are within the scope of IFRS 9 Financial Instruments.E1 |
| E1 | [IFRIC® Update, May 2008, Agenda Decision, ‘IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Deposits on returnable containers’ The IFRIC was asked to provide guidance on the accounting for the obligation to refund deposits on returnable containers. In some industries, entities that distribute their products in returnable containers collect a deposit for each container delivered and have an obligation to refund this deposit when containers are returned by the customer. The issue was whether the obligation should be accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The IFRIC noted that paragraph 11 of IAS 32 Financial Instruments: Presentation defines a financial instrument as ‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.’ Following delivery of the containers to its customers, the seller has an obligation only to refund the deposit for any returned containers. In circumstances in which the containers are derecognised as part of the sale transaction, the obligation is an exchange of cash (the deposit) for the containers (non‑financial assets). Whether that exchange transaction occurs is at the option of the customer. Because the transaction involves the exchange of a non‑financial item, it does not meet the definition of a financial instrument in accordance with IAS 32. In contrast, when the containers are not derecognised as part of the sale transaction, the customer’s only asset is its right to the refund. In such circumstances, the obligation meets the definition of a financial instrument in accordance with IAS 32 and is therefore within the scope of IAS 39. In particular, paragraph 49 of IAS 39 states that ‘the fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.’ The IFRIC concluded that divergence in this area was unlikely to be significant and therefore decided not to add this issue to its agenda.] |
3 | Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent. This Standard does not apply to executory contracts unless they are onerous. |
4 | [Deleted] |
5 | When another Standard deals with a specific type of provision, contingent liability or contingent asset, an entity applies that Standard instead of this Standard. For example, some types of provisions are addressed in Standards on:
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| E2 | [IFRIC® Update, September 2017, Agenda Decision, ‘IAS 12 Income Taxes—Interest and penalties related to income taxes’ IFRS Standards do not specifically address the accounting for interest and penalties related to income taxes (interest and penalties). In the light of the feedback received on the draft IFRIC Interpretation Uncertainty over Income Tax Treatments, the Committee considered whether to add a project on interest and penalties to its standard-setting agenda. On the basis of its analysis, the Committee concluded that a project on interest and penalties would not result in an improvement in financial reporting that would be sufficient to outweigh the costs. Consequently, the Committee decided not to add a project on interest and penalties to its standard-setting agenda. Nonetheless, the Committee observed that entities do not have an accounting policy choice between applying IAS 12 and applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets to interest and penalties. Instead, if an entity considers a particular amount payable or receivable for interest and penalties to be an income tax, then the entity applies IAS 12 to that amount. If an entity does not apply IAS 12 to a particular amount payable or receivable for interest and penalties, it applies IAS 37 to that amount. An entity discloses its judgement in this respect applying paragraph 122 of IAS 1 Presentation of Financial Statements if it is part of the entity’s judgements that had the most significant effect on the amounts recognised in the financial statements. Paragraph 79 of IAS 12 requires an entity to disclose the major components of tax expense (income); for each class of provision, paragraphs 84–85 of IAS 37 require a reconciliation of the carrying amount at the beginning and end of the reporting period as well as other information. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material. The Committee also observed it had previously published agenda decisions discussing the scope of IAS 12 in March 2006 and May 2009.] |
6 | [Deleted] |
7 | This Standard defines provisions as liabilities of uncertain timing or amount. In some countries the term ‘provision’ is also used in the context of items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed in this Standard. |
8 | Other Standards specify whether expenditures are treated as assets or as expenses. These issues are not addressed in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made. |
9 | This Standard applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation, additional disclosures may be required by IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations. |
10 | The following terms are used in this Standard with the meanings specified: A provision is a liability of uncertain timing or amount. A liability is a present obligation [Refer:paragraphs 15 and 16] of the entity arising from past events, [Refer:paragraphs 17–22] the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.1 An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from:
A constructive obligation is an obligation that derives from an entity’s actions where:
A contingent liability is:
A contingent asset is 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.E3 An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. A restructuring is a programme that is planned and controlled by management, and materially changes either:
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| E3 | [IFRIC® Update, January 2019, Agenda Decision, ‘IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Deposits relating to taxes other than income tax’ The Committee received a request about how to account for deposits relating to taxes that are outside the scope of IAS 12 Income Taxes (ie deposits relating to taxes other than income tax). ... Whether the tax deposit gives rise to an asset, a contingent asset or neither The Committee observed that if the tax deposit gives rise to an asset, that asset may not be clearly within the scope of any IFRS Standard. Furthermore, the Committee concluded that no IFRS Standard deals with issues similar or related to the issue that arises in assessing whether the right arising from the tax deposit meets the definition of an asset. Accordingly, applying paragraphs 10–11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Committee referred to the two definitions of an asset in IFRS literature—the definition in the Conceptual Framework for Financial Reporting issued in March 2018 and the definition in the previous Conceptual Framework that was in place when many existing IFRS Standards were developed. The Committee concluded that the right arising from the tax deposit meets either of those definitions. The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability. The nature of the tax deposit—whether voluntary or required—does not affect this right and therefore does not affect the conclusion that there is an asset. The right is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity. ... [The full text of the agenda decision is reproduced after paragraph 11 of IAS 8.]] |
11 | Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
Accruals are often reported as part of trade and other payables, whereas provisions are reported separately. |
12 | In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this Standard the term ‘contingent’ is used for liabilities and assets that are not recognised because their 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. In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria. |
13 | This Standard distinguishes between:
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14 | A provision shall be recognised when:
If these conditions are not met, no provision shall be recognised. |
15 | In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period. |
16 | In almost all cases it will be clear whether a past event [Refer:paragraphs 17–22] has given rise to a present obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an entity determines whether a present obligation exists at the end of the reporting period by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the reporting period. [Refer:IAS 10] On the basis of such evidence:
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17 | A past event that leads to a present obligation [Refer:paragraphs 15 and 16] is called an obligating event. For an event to be an obligating event, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. This is the case only:
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18 | Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s statement of financial position are those that exist at the end of the reporting period. |
19 | It is only those obligations arising from past events existing independently of an entity’s future actions (ie the future conduct of its business) that are recognised as provisions. Examples of such obligations are penalties or clean‑up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the entity. Similarly, an entity recognises a provision for the decommissioning costs of an oil installation or a nuclear power station to the extent that the entity is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal requirements, an entity may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory). Because the entity can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation [Refer:paragraphs 15 and 16] for that future expenditure and no provision is recognised.E4 |
| E4 | [IFRIC® Update, June 2022, Agenda Decision, ‘IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Negative Low Emission Vehicle Credits’ The Committee received a request asking whether particular measures to encourage reductions in vehicle carbon emissions give rise to obligations that meet the definition of a liability in IAS 37. The request The request described government measures that apply to entities that produce or import passenger vehicles for sale in a specified market. Under the measures, entities receive positive credits if, in a calendar year, they have produced or imported vehicles whose average fuel emissions are lower than a government target. Entities receive negative credits if, in that year, they have produced or imported vehicles whose average fuel emissions are higher than the target. The measures require an entity that receives negative credits for one year to eliminate these negative credits by obtaining and surrendering positive credits. The entity can obtain positive credits either by purchasing them from another entity or by generating them itself in the next year (by producing or importing more low-emission vehicles). If the entity fails to eliminate its negative credits, the government can impose sanctions on the entity. These sanctions would not require payment of fines or penalties, or any other outflow of resources embodying economic benefits, but could deny the entity opportunities in the future, for example by restricting the entity’s access to the market. The request considered the position of an entity that has produced or imported vehicles with average fuel emissions higher than the government target, and asked whether such an entity has a present obligation that meets the definition of a liability in IAS 37. Applicable requirements Paragraph 10 of IAS 37:
An entity has no realistic alternative to settling an obligation only where settlement can be enforced by law or, in the case of a constructive obligation, where the entity’s actions have created valid expectations in other parties that the entity will discharge the obligation (paragraph 17 of IAS 37). The Committee observed that, in determining whether it has a liability, the entity described in the request would consider:
The Committee’s conclusions Outflow of resources embodying economic benefits An entity can settle an obligation to eliminate negative credits either by purchasing credits from another entity or by generating positive credits itself in the next year. The Committee concluded that either method of settling the obligation would result in an outflow of resources embodying economic benefits. These resources are the positive credits the entity would surrender to eliminate the negative balance. The entity could otherwise have used self-generated positive credits for other purposes—for example, to sell to other entities with negative credits. The event that creates a present obligation The definition of a liability in IAS 37 requires an entity to have a ‘present obligation … arising from past events’. Paragraph 19 of IAS 37 adds that it is only those obligations arising from past events existing independently of an entity’s future actions that meet the definition of a liability. Two IFRIC Interpretations of IAS 37 provide further relevant requirements—they address specific types of government-imposed charges and specify which events give rise to a present obligation for these types of charges:
In the fact pattern described in the request, the activity that triggers a requirement to eliminate negative credits (or in other words, the activity to which the measures link that requirement) is the production or import of vehicles with average fuel emissions higher than the government target. If in a calendar year an entity has produced or imported vehicles with average fuel emissions higher than the government target, an obligation:
Therefore, the Committee concluded that, in the fact pattern described in the request, the activity that gives rise to a present obligation is the production or import of vehicles whose fuel emissions, averaged for all the vehicles produced or imported in that calendar year, are higher than the government target. The Committee observed that a present obligation could arise at any date within a calendar year (on the basis of the entity’s production or import activities to that date), not only at the end of the calendar year. No realistic alternative to settling an obligation The Committee concluded that the measures described in the request could give rise to a legal obligation:
An entity would have a legal obligation that is enforceable by law if accepting the possible sanctions for non-settlement is not a realistic alternative for that entity. The Committee observed that determining whether accepting sanctions is a realistic alternative for an entity requires judgement—the conclusion will depend on the nature of the sanctions and the entity’s specific circumstances. The possibility of a constructive obligation The Committee concluded that, if an entity determines that it has no legal obligation to eliminate its negative credits, it would then need to consider whether it has a constructive obligation to do so. It would have a constructive obligation if it has both:
Other IAS 37 requirements The request asked only whether the government measures give rise to obligations that meet the definition of a liability in IAS 37. The Committee observed that, having identified such an obligation, an entity would apply other requirements in IAS 37 to determine how to measure the liability. The Committee did not discuss these other requirements. The Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine whether, in the fact pattern described in the request, it has an obligation that meets the definition of a liability in IAS 37. Consequently, the Committee decided not to add a standard-setting project to the work plan.] |
20 | An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed—indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will discharge its responsibilities. |
21 | An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act (for example, a sufficiently specific public statement) by the entity gives rise to a constructive obligation. For example, when environmental damage is caused there may be no obligation to remedy the consequences. However, the causing of the damage will become an obligating event when a new law requires the existing damage to be rectified or when the entity publicly accepts responsibility for rectification in a way that creates a constructive obligation. |
22 | Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. For the purpose of this Standard, such an obligation is treated as a legal obligation. Differences in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted. |
23 | For a liability to qualify for recognition there must be not only a present obligation [Refer:paragraphs 15 and 16] but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Standard,2 an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, ie the probability that the event will occur is greater than the probability that it will not. Where it is not probable that a present obligation exists, an entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 86). |
24 | Where there are a number of similar obligations (eg product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class [Refer:paragraph 39] of obligations as a whole. Although the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if the other recognition criteria are met). |
25 | The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other items in the statement of financial position. Except in extremely rare cases, an entity will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. |
26 | In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 86). |
27 | An entity shall not recognise a contingent liability. |
28 | A contingent liability is disclosed, as required by paragraph 86, unless the possibility of an outflow of resources embodying economic benefits is remote. |
29 | Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. The entity recognises a provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate [Refer:paragraphs 25 and 26] can be made. |
30 | Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made). |
31 | An entity shall not recognise a contingent asset. |
32 | Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain. |
33 | Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. |
34 | A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is probable. |
35 | Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset (see paragraph 89). |
36 | The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation [Refer:paragraphs 15 and 16] at the end of the reporting period. |
37 | The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation [Refer:paragraphs 15 and 16] at the end of the reporting period or to transfer it to a third party at that time.E5 It will often be impossible or prohibitively expensive to settle or transfer an obligation at the end of the reporting period. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. |
| E5 | [IFRIC® Update, May 2014, Agenda Decision, ‘IAS 37 Provisions, Contingent Liabilities and Contingent Assets—measurement of liabilities arising from emission trading schemes’ The Interpretations Committee received a request to clarify the measurement of a liability under IAS 37 that arises from an obligation to deliver allowances in an emission trading scheme. The request asked whether the measurement of the liability for the obligation to deliver allowances should reflect current values of allowances at the end of each reporting period if IAS 37 was applied to the liability. The request noted that this was the basis required by IFRIC 3 Emission Rights, which was withdrawn in June 2005. The Interpretations Committee noted that when the IASB withdrew IFRIC 3, it affirmed that IFRIC 3 was an appropriate interpretation of existing IFRS for accounting for the emission trading schemes that were within the scope of IFRIC 3. However, the IASB acknowledged that, as a consequence of following existing IFRS, IFRIC 3 had created unsatisfactory measurement and reporting mismatches between assets and liabilities arising from emission trading schemes. In 2012, the IASB added to its agenda a research project on the accounting for emissions trading schemes. The Interpretations Committee noted that one of the main issues in the IASB’s project on emission trading schemes was whether the accounting for the liabilities arising from emission trading schemes should be considered separately from the accounting for the assets. Consequently, the Interpretations Committee noted that to provide an interpretation of IFRS on the measurement of a liability arising from the obligation to deliver allowances related to an emission trading scheme would be too broad an issue for it to deal with. On the basis of this analysis, the Interpretations Committee decided not to add this issue to its agenda.] |
38 | The estimates of outcome and financial effect are determined by the judgement of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the reporting period. [Refer:IAS 10] |
39 | Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is ‘expected value’. The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid‑point of the range is used.
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40 | Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the entity considers other possible outcomes. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. For example, if an entity has to rectify a serious fault in a major plant that it has constructed for a customer, the individual most likely outcome may be for the repair to succeed at the first attempt at a cost of 1,000, but a provision for a larger amount is made if there is a significant chance that further attempts will be necessary. |
42 | The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision. |
43 | Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision. |
44 | Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 85(b). |
45 | Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. |
46 | Because of the time value of money, provisions relating to cash outflows that arise soon after the reporting period are more onerous than those where cash outflows of the same amount arise later. Provisions are therefore discounted, where the effect is material. |
47 | The discount rate (or rates) shall be a pre‑tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability.E6 The discount rate(s) shall not reflect risks [Refer:paragraphs 42–44] for which future cash flow estimates have been adjusted. |
| E6 | [IFRIC® Update, March 2011, Agenda Decision, ‘IAS 37 Provisions, Contingent Liabilities and Contingent Assets—inclusion of own credit risk in the discount rate’ The Interpretations Committee received a request for interpretation of the phrase ‘the risks specific to the liability’ and whether this means that an entity’s own credit risk (performance risk) should be excluded from any adjustments made to the discount rate used to measure liabilities. The request assumed that future cash flow estimates have not been adjusted for the entity’s own credit risk. The Committee observed that paragraph 47 of IAS 37 states that ‘risks specific to the liability’ should be taken into account in measuring the liability. The Committee noted that IAS 37 does not explicitly state whether or not own credit risk should be included. The Committee understood that the predominant practice today is to exclude own credit risk, which is generally viewed in practice as a risk of the entity rather than a risk specific to the liability. The Committee also noted that this request for guidance would be best addressed as part of the Board’s project to replace IAS 37 with a new liabilities standard, and that the Board is already considering the request for additional guidance to be incorporated into this new standard. For this reason, the Committee decided not to add this issue to its agenda.] |
48 | Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occur. |
49 | Expected future events may be particularly important in measuring provisions. For example, an entity may believe that the cost of cleaning up a site at the end of its life will be reduced by future changes in technology. The amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all available evidence as to the technology that will be available at the time of the clean‑up. Thus it is appropriate to include, for example, expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex clean‑up operation than has previously been carried out. However, an entity does not anticipate the development of a completely new technology for cleaning up unless it is supported by sufficient objective evidence. |
50 | The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case. Evidence is required both of what legislation will demand and of whether it is virtually certain to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new legislation is enacted. |
51 | Gains from the expected disposal of assets shall not be taken into account in measuring a provision. |
52 | Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an entity recognises gains on expected disposals of assets at the time specified by the Standard dealing with the assets concerned. |
53 | Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision. |
54 | In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. |
55 | Sometimes, an entity is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). The other party may either reimburse amounts paid by the entity or pay the amounts directly. |
56 | In most cases the entity will remain liable for the whole of the amount in question so that the entity would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when it is virtually certain that reimbursement will be received if the entity settles the liability. |
57 |
58 | As noted in paragraph 29, an obligation for which an entity is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. |
59 | Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate [Refer:paragraphs 36–41]. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed. |
60 | Where discounting is used, [Refer:paragraphs 45–47] the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as borrowing cost. |
61 | A provision shall be used only for expenditures for which the provision was originally recognised. |
62 | Only expenditures that relate to the original provision are set against it. Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events. |
63 | Provisions shall not be recognised for future operating losses. |
64 | Future operating losses do not meet the definition of a liability in paragraph 10 and the general recognition criteria set out for provisions in paragraph 14. |
65 | An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An entity tests these assets for impairment under IAS 36 Impairment of Assets. |
66 | If an entity has a contract that is onerous, the present obligation [Refer:paragraphs 15 and 16] under the contract shall be recognised and measured as a provision.
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67 | Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this Standard and a liability exists which is recognised. Executory contracts [Refer:paragraph 3] that are not onerous fall outside the scope of this Standard. |
68 | This Standard defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. |
68A | The cost of fulfilling a contract comprises the costs that relate directly to the contract. Costs that relate directly to a contract consist of both:
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69 | Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulfilling the contract (see IAS 36). [Refer:Basis for Conclusions paragraph BC17] |
70 | The following are examples of events that may fall under the definition of restructuring:
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71 | A provision for restructuring costs is recognised only when the general recognition criteria for provisions set out in paragraph 14 are met. Paragraphs 72–83 set out how the general recognition criteria apply to restructurings. |
72 | A constructive obligation to restructure arises only when an entity:
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73 | Evidence that an entity has started to implement a restructuring plan would be provided, for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan. A public announcement of a detailed plan to restructure constitutes a constructive obligation to restructure only if it is made in such a way and in sufficient detail (ie setting out the main features of the plan) that it gives rise to valid expectations in other parties such as customers, suppliers and employees (or their representatives) that the entity will carry out the restructuring. |
74 | For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely. If it is expected that there will be a long delay before the restructuring begins or that the restructuring will take an unreasonably long time, it is unlikely that the plan will raise a valid expectation on the part of others that the entity is at present committed to restructuring, because the timeframe allows opportunities for the entity to change its plans. |
75 | A management or board decision to restructure taken before the end of the reporting period does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period:
If an entity starts to implement a restructuring plan, or announces its main features to those affected, only after the reporting period, disclosure is required under IAS 10 Events after the Reporting Period, if the restructuring is material and non‑disclosure could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. |
76 | Although a constructive obligation is not created solely by a management decision, an obligation may result from other earlier events together with such a decision. For example, negotiations with employee representatives for termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met. |
77 | In some countries, the ultimate authority is vested in a board whose membership includes representatives of interests other than those of management (eg employees) or notification to such representatives may be necessary before the board decision is taken. Because a decision by such a board involves communication to these representatives, it may result in a constructive obligation to restructure. |
78 | No obligation arises for the sale of an operation until the entity is committed to the sale, ie there is a binding sale agreement. |
79 | Even when an entity has taken a decision to sell an operation and announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. Until there is a binding sale agreement, the entity will be able to change its mind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for impairment, under IAS 36. When a sale is only part of a restructuring, a constructive obligation can arise for the other parts of the restructuring before a binding sale agreement exists. |
80 | A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both:
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81 | A restructuring provision does not include such costs as:
These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Such expenditures are recognised on the same basis as if they arose independently of a restructuring. |
82 | Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract as defined in paragraph 10. |
83 | As required by paragraph 51, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring. |
| Disclosure of other provisions, contingent liabilities and contingent assets [text block] Disclosure | Text block | 800500, 827570 |
84 | For each class [Refer:paragraph 87] of provision, an entity shall disclose:
Comparative information is not required.
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85 | An entity shall disclose the following for each class [Refer:paragraph 87] of provision:
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86 | Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class [Refer:paragraph 87] of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability and, where practicable:
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87 | In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary to consider whether the nature of the items is sufficiently similar for a single statement about them to fulfil the requirements of paragraphs 85(a) and (b) and 86(a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to normal warranties and amounts that are subject to legal proceedings.
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88 | Where a provision and a contingent liability arise from the same set of circumstances, an entity makes the disclosures required by paragraphs 84–86 in a way that shows the link between the provision and the contingent liability.
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89 | Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the end of the reporting period, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 36–52.
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90 | It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of income arising. |
91 | Where any of the information required by paragraphs 86 and 89 is not disclosed because it is not practicable to do so, that fact shall be stated.
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92 | In extremely rare cases, disclosure of some or all of the information required by paragraphs 84–89 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.
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93 | The effect of adopting this Standard on its effective date (or earlier) shall be reported as an adjustment to the opening balance of retained earnings for the period in which the Standard is first adopted. Entities are encouraged, but not required, to adjust the opening balance of retained earnings for the earliest period presented and to restate comparative information. [Refer:IAS 1 paragraphs 38–44] If comparative information is not restated, this fact shall be disclosed. |
94 | [Deleted] |
94A | Onerous Contracts—Cost of Fulfilling a Contract, issued in May 2020, added paragraph 68A and amended paragraph 69. An entity shall apply those amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments (the date of initial application). The entity shall not restate comparative information. Instead, the entity shall recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at the date of initial application. [Refer:Basis for Conclusions paragraphs BC20–BC21] |
95 | This Standard becomes operative for annual financial statements covering periods beginning on or after 1 July 1999. Earlier application is encouraged. If an entity applies this Standard for periods beginning before 1 July 1999, it shall disclose that fact. |
96 | [Deleted] |
97 | [Deleted] |
98 | [Deleted] |
99 | Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended paragraph 5 as a consequential amendment derived from the amendment to IFRS 3. An entity shall apply that amendment prospectively to business combinations to which the amendment to IFRS 3 applies. [Refer:IFRS 3 Basis for Conclusions paragraph BC434D] |
100 | IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraph 5 and deleted paragraph 6. An entity shall apply those amendments when it applies IFRS 15. |
101 | IFRS 9, as issued in July 2014, amended paragraph 2 and deleted paragraphs 97 and 98. An entity shall apply those amendments when it applies IFRS 9. |
102 | IFRS 16, issued in January 2016, amended paragraph 5. An entity shall apply that amendment when it applies IFRS 16. |
103 | IFRS 17, issued in May 2017, amended paragraph 5. An entity shall apply that amendment when it applies IFRS 17. |
104 | Definition of Material (Amendments to IAS 1 and IAS 8), issued in October 2018, amended paragraph 75. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2020. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. An entity shall apply those amendments when it applies the amendments to the definition of material in paragraph 7 of IAS 1 and paragraphs 5 and 6 of IAS 8. |
105 | Onerous Contracts—Cost of Fulfilling a Contract, issued in May 2020, added paragraphs 68A and 94A and amended paragraph 69. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. |
Onerous Contracts—Cost of Fulfilling a Contract, which amended IAS 37, was approved for issue by all 14 members of the International Accounting Standards Board.
| Hans Hoogervorst | Chairman |
| Suzanne Lloyd | Vice-Chair |
| Nick Anderson | |
| Tadeu Cendon | |
| Martin Edelmann | |
| Françoise Flores | |
| Gary Kabureck | |
| Jianqiao Lu | |
| Darrel Scott | |
| Thomas Scott | |
| Chungwoo Suh | |
| Rika Suzuki | |
| Ann Tarca | |
| Mary Tokar |
| 1 | The definition of a liability in this Standard was not revised following the revision of the definition of a liability in the Conceptual Framework for Financial Reporting issued in 2018. (back) |
| 2 | The interpretation of ‘probable’ in this Standard as ‘more likely than not’ does not necessarily apply in other Standards. (back) |