CACC021 – COURSE NOTES 1

MODULE 3: IAS37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

CONTENT
1. PURPOSE
2. OBJECTIVES / OUTCOMES FOR THE MODULE
3. PRE-LECTURE PREP: LEARN BEFORE LECTURE (LBL) ASSIGNMENT
4. SECTIONS IN TEXTBOOK EXCLUDED FROM 2ND YEAR SCOPE
5. CHAPTER SUMMARY
6. PRESENTATION AND DISCLOSURE
7. LECTURE SLIDES

1. PURPOSE
The objective of IAS37 is to prescribe the accounting treatment and disclosures for provisions,
contingent liabilities and contingent assets. These are linked by their commonality as areas that
require judgement at the end of an accounting period. In all three cases, the correct treatment in
terms of making accounting adjustments or making disclosure (or ignoring altogether) comes down
to careful examination of the definitions therein.

2. OBJECTIVES / OUTCOMES FOR THE MODULE

After you have studied this module, you should be able to do the following:
 Explain the difference between liabilities, contingent liabilities and provisions.
 Know and apply the principles of legal and constructive obligations.
 Analyse practical examples and determine whether the amounts must be classified as
provisions, contingent liabilities or contingent assets.
 Account for provisions.
 Present and disclose provisions, contingent liabilities and contingent assets in the annual
financial statements.
 CACC021 – COURSE NOTES 2

3. PRE-LECTURE PREP: LEARN BEFORE LECTURE (LBL) ASSIGNMENT

WHAT?
Prescribed textbook: Financial Accounting IFRS Principles (5th
Edition)
Relevant chapter in prescribed textbook: Chapter 14 – Provisions, contingent liabilities
and contingent assets

Any additional notes included in these course notes

HOW?
Within 24 hours before lecture, it is vital to preview the material that will be covered in the lecture.
This step rarely takes longer than 30 minutes, especially once you’re familiar with how to properly
preview information.
In order to prepare for the lecture on IAS37 Provisions, contingent liabilities and contingent assets
you are required to:
 Read the title and the chapter’s evaluation criteria (Chapter 14 of your prescribed textbook –
Financial Accounting: IFRS Principles). Skipping the title and chapter objectives can be
detrimental. It is nearly impossible to process information when you have no central theme to
apply it to.
 Read the chapter summary (text book and additional course notes). This summary combined
with the information on the title page can act as a movie preview, creating interest and providing
a bit of familiarity with the concepts.
 Read the entire chapter aiming to understand concepts that are introduced.
 Acknowledge terminology that you’re unfamiliar with so that you’re not intimidated when you
hear the same term(s) again in the lecture. Also note down any questions that arise during the
pre-lecture prep to clarify during the lecture.
Now that you’ve effectively prepped for the lecture’s content, taking notes and following along
should be far more manageable.

4. SECTIONS IN TEXTBOOK EXCLUDED FROM 2ND YEAR SCOPE

PAGE NO. PARAGRAPH IAS37 REFERENCE
Par 29 Recognition of contingent liabilities
where the entity is jointly and severally liable for
obligations.
Par 39 Measurement involving a large
population of items
Par 40 Measurement of a single obligation
where the entity considers other possible
outcomes when there is an individual most likely
outcome.
465 - 467 3.3 Reimbursements Par 53 – 58 Reimbursements
467 - 468 3.5 Onerous contracts Par 66 – 69 Onerous contracts
468 - 469 3.6 Restructuring Par 70 – 83 Restructuring
476 - 478 6. Commitments
478 7. Government grants IAS 20 Government grants
 CACC021 – COURSE NOTES 3

5. CHAPTER SUMMARY – IAS37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

DEFINITIONS

A LIABILITY is a present A CONTINGENT ASSET is A CONTINGENT LIABILITY is: An OBLIGATING EVENT is an event A CONSTRUCTIVE OBLIGATION is
obligation of the entity arising a possible asset that arises  A possible obligation that arises from past events that creates a legal or constructive an obligation that derives from an
from past events which is from past events, and whose whose existence will be confirmed only by the obligation that results in an entity having entity’s actions where:
expected to be settled by the existence will be confirmed occurrence or non-occurrence of some uncertain future no realistic alternative to settling that  The entity has indicated to other
outflow of economic benefits. only by the occurrence or event not wholly within the entity’s control; OR obligation. parties (by a pattern of past
non-occurrence of one or
A PROVISION is a liability of  A present obligation that arises from a past event but is A LEGAL OBLIGATION is an obligation practice, published policies or a
more uncertain future events current statement) that it will
uncertain timing or amount. not recognised because: that derives from:
not wholly within the control
→ It is not probable that an outflow of resources accept certain responsibilities;
of the entity.
embodying economic benefits will be required to  A contract (through its explicit or AND
settle the obligation; OR implicit terms)  As a result, the entity has created
→ The amount of the obligation cannot be measured  Legislation in the other parties a valid
with sufficient reliability.  Other operation of law expectation it will discharge those
responsibilities.

RECOGNITION

CONTINGENT LIABILITIES CONTINGENT ASSETS PROVISIONS

Contingent liabilities are NOT RECOGNISED. Contingent assets are NOT RECOGNISED. Provisions are recognised when ALL of the following conditions are met: SPECIFIC APPLICATION:
[Disclose unless the possibility of an outflow of [Disclose where an inflow of economic  The entity has a present legal or constructive obligation as a result of a past NO PROVISION should be
economic benefits is remote.] benefits is probable.] event (the obligating event). recognised for future operating
losses as they do not meet the
 An outflow of economic benefit to settle the obligation is probable (“more
definition of a liability at the
likely than not”).
end of the financial reporting
 The amount of the obligation can be estimated reliably. period.

MEASUREMENT

Best estimate The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the financial reporting date, that is, the amount that an
entity would rationally pay to settle the obligation at the end of the financial reporting period to transfer it to a 3rd party.
The estimate is made by the management of the entity in light of all available evidence, including that received after the end of the financial reporting date, and may be supplemented by
the evidence of independent experts.

Risks and uncertainties The risks and uncertainties that inevitably surround may events and circumstances shall be taken into account in reaching the best estimate of a provision.

Present value Where the effect of the time value of money is material, the amount of the provision is the PRESENT VALUE of the expenditures expected to be required to settle the obligation. The
provisions should be discounted using a PRE-TAX discount rate that reflects the current market assessment of the time value of money and the risks specific to the liability – the
discount rate does not reflect risks for which future cash flow estimates have been adjusted.

Future events 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 it will occur.

Expected disposal of Gains from the expected disposal of assets are NOT taken into account in measuring the provision.
assets

Changes in provisions Provisions must be reviewed at each financial reporting date and the amount adjusted to reflect the current best estimate. Any adjustments to amounts previously recognised shall be
recognised in profit or loss UNLESS the provision was originally recognised as part of the cost of an asset (IAS8 will be applied in this case). 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.

Use of provisions A provision shall be used only for expenditures for which the provision was originally recognised.
 CACC021 – COURSE NOTES 4

6. PRESENTATION AND DISCLOSURE

UL LTD
[EXTRACT FROM THE] STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019
ALL MONETARY MOUNTS EXPRESSED IN
THOUSANDS OF RANDS Note(s) 2019 2018
Liabilities
Non-current liabilities
Long-term borrowings 13 XXX XXX
Lease liabilities 14 XXX XXX
Provisions 15 XXX XXX
Total non-current liabilities XXX XXX

UL LIMITED
[EXTRACT FROM THE] NOTES TO THE FINANCIAL STATEMETNS FOR THE YEAR ENDED
31 DECEMBER 2019
1. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these financial statements have been
consistently applied to all years presented, unless otherwise stated.
1.11 PROVISIONS AND CONTINGENCIES
Provisions are recognised when:

 The company has a present obligation as a result of a past event;

 It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
 A reliable estimate can be made of the obligation.
Provisions are measured at the present value of the amount expected to be required to settle the
obligation using a pre-tax rate that reflects current market assessments of the time value of money
and the risks specific to the obligation. The increase in the provision due to passage of time is
recognised as interest expense.
Provisions are not recognised for future operating losses.
Contingent assets and contingent liabilities are not recognised. Contingencies are disclosed in
note 22.
 CACC021 – COURSE NOTES 5

15. PROVISIONS
Decommissioning Legal
costs claims Total
R’000 R’000 R’000
31 December 2019
Balance at the beginning of the year XXX XXX XXX
Additional provisions raised XXX XXX XXX
Increase in provision – increased future costs XXX (XXX) (XXX)
Increase in present value – unwinding of discount: XXX (XXX) (XXX)
Finance charges
Amounts charged against provision during the (XXX) (XXX) (XXX)
year
Unused amounts reversed during the year (XXX) (XXX) (XXX)
Balance at the end of the year XXX XXX XXX

Decommissioning costs
The plant is expected to be decommissioned on 31/12/2025 and is expected to result in cash
outflows of RXXX (2018: RXXX). The amount of the outflow is uncertain due to changing prices.
The timing of the outflow is uncertain due to the changing asset usage, which may result in a longer
or shorter useful life. Major assumptions include the 10% interest rate and the 6-year useful life
remaining unchanged.
Legal claims
The legal claim provision recognises claims against the company arising from prosecution in relation
to legislative and contractual breaches. The liability at period end was assessed by management by
reviewing individual claims and discussing the company’s position with its legal advisors. The
liability is inherently uncertain due to the existence or amount of individual claims being in dispute.
The company anticipates that the liability will be settled or released over the next five years.
22. CONTINGENT ASSETS AND LIABILITIES
22.1 CONTINGENT LIABILITIES
The company is from time to time involved in various disputes, claims and legal proceedings arising
in the ordinary course of business. The company, in consultation with its legal counsel, assesses
the potential outcome of these proceedings on an ongoing basis. As proceedings progress,
management makes provision in respect of legal proceedings where appropriate. It is not
anticipated that any adverse decisions in any ongoing or pending proceeding or claim against the
company will have a material adverse effect on the financial condition or future of the company.
22.2 CONTINGENT ASSETS
At 31 December 2019, the company had a dispute with a supplier in terms of the price of the supply
of goods. In 2010, the Commission Tribunal ruled that the supplier had been overcharging
customers and set a rate at which customers should be charged in future. During the 2018 financial
year, the supplier increased its prices above the agreed rate despite a High Court ruling confirming
the Tribunal’s decisions. In March 2019, the supplier was granted leave to appeal by the High Court
which is scheduled to take place in February 2020. At 31 December 2019, the company has a
contingent asset of approximately R2 200 000 in respect of the recoverable amount where the
company paid the supplier the higher price on an interim basis pending the outcome of the legal
proceedings. This asset is not considered virtually certain due to the pending appeal and
accordingly was not raised at 31 December 2019.