IAS 37 Provisions

@zhela
There are three criteria to recognise a provision:
R- Reasonably reliable estimate
O- present obligation(legal or constructive)
T- cash expected to transfer out

Example:
A company spills chemicals onto arable land, causing damage that will cost $10m
to clean. There is no environmental legislation but the company has stated that it uses “green policies” on
its website.

(R) There is already an estimate available in the sum of $10m.
(O) There is a constructive obligation resultant from the green policy statement (because it was public)
(T) Obviously money will flow out when the land is cleaned.

Therefore the costs must be provided for as follows:
Dr Cleaning costs (I/S) $10m
Cr Provision (B/S) $10m

Contingencies are cash flows that are uncertain for some reason.
They are accounted for based on the probabilty of the inflows(assets) or outflows(liabilities)

Probable- Provide for liability, Disclose asset
Possible- Disclose for liability, Ignore asset
Remote – Ignore both asset and liability

Question:
A newspaper accuses a public figure of being a drug dealer, even though they know this is
not true. The public figure sues and both sets of lawyers agree that it is likely that
the public figure will win the case and receive damages of $1m.
The case is unlikely to be resolved before the financial statements are issued.

Answer:
Newspaper will provide for $1m liability and public figure will disclose a contingent asset of $1m.