IAS 37 provision problem

Back in the day, the mantra that I learned from my tutor was:

“We always recognise a loss as soon as it is suspected and we never recognise a gain until it has actually been achieved”

Accounting for contingent assets blew that one out of the water!

So too did the differentiation between possible and probable for liabilities, contingent and recognised respectively

But a big issue is the full accounting for provisions. If we know that we shall ahve to replace the tyres on our fleet of vehicles every three years, it used to be the case that we would provide 1/3 of the cost each year for the first 2 years and then, in year three we only charged the profit and loss account with 1/3 of the cost and we released the 2 year accumulated provision

Dr Tyres (PnL account) 3000
Cr Cash 3,000
Dr Provision 2,000
Cr Provision no longer required (PnL account)

So the cost of 3,000 was evenly spread over the three affected years

Now, of course, we don’t make any provision until there is a positive commitment / obligation

So whereas we used to see (1,000), (1,000), (1,000) in three separate profit and loss accounts, now we have (-), (-), (3,000)

And there’s your distortion and volatility!

There is another problem … there is a dividing line in the consideration of liabilities – whether they should be classed as probable or as possible

Both expressions come down to a matter of estimation and an optimist is likely to view the possible outcome rather differently than a pessimist

Hence volatility and loss of comparability

OK?