IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
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Transcript of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
IAS 37 Provisions, Contingent
Liabilities and Contingent Assets
A liability is a present obligation of the entity
arising from past events, the settlement of which is expected
to result in an outflow from the entity of resources embodying economic benefits
Constructive obligationAn obligation that derives from an entity’s
actions where: by an established pattern of past practice, published
or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities
Obligating event is an event that creates a legal or constructive obligation that the results in an entity having no realistic alternative to setting that obligation.
A provision is a liability of uncertain timing or amount
A provision shall be recognized when:An entity has a present obligation (legal or
constructive) as a result of a past eventIt 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 amount of the obligation.
Measurement of provisionsThe amount recognized as a provision shall be the best estimate
of the expenditure required to settle the present obligation at the end of the reporting period.
Where the provision being measured involves large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (“expected value method”).
Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability.
Change in provisions and use of provisions
Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate.
When there is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed.
A provision shall be used only for expenditures for which the provision was originally recognized.
Future operating losses
Future operating losses do not meet the definition of a liability and the general recognition criteria set out for provisions.
Provisions shall not be recognized for future operating losses.
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.
The present obligation under the contract shall be recognized and measured as a
RestructuringA restructuring is a program that is planned and controlled by management, and materially changes either:
the scope of a business undertaken by the entity; or
the manner in which that business is conducted
Examples of events that may be qualified as restructuring: sale or termination of a line of business, closure of business locations in a region, relocation of business activities from one location to another, fundamental reorganization of the entity that have a material effect on the nature and focus of the entity’s operations..
Restructuring provisionA constructive obligation to restructure arises only when an entity: has a detailed formal plan for the restructuring identifying at least:
the business or part of a business concerned; the principal locations affected; the location, function, and approximate number of employees
who will be compensated for terminating their service; the expenditure that will be undertaken; andwhen the plan will be implemented; and
has raised a valid expectations in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
Contingent liabilities A contingent liability is:
a possible obligation 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 control of the entity; or
a present obligation that arises from the past events but is not recognized because
it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
the amount of the obligation cannot be measured with sufficient reliability.
Provision or contingent liability
Present obligation as a result of an obligating event
Disclose contingent liability
No (rare) No
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
For each class of the provision, an entity shall disclose:the carrying amount at the beginning and the
end of the periodadditional provisions made in the period,
including increases to existing provisionamounts utilized during the periodunused amounts reversed during the period the description of the nature of the obligation
and the expected timing of any resulting outcomes of economic benefits
WarrantiesA provision of $60 000 has been recognized for expected warranty claims on products sold during the last three years. It is expected that the majority of this expenditure will be incurred in the next financial year, and all will be incurred within two years after the reporting period
Disclosure exemptionLitigation is a process against the company relating to a dispute with the competitor who alleges that the company has infringed patents and is seeking damages of $ 100 million. Information usually required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets is not disclosed on the grounds that it can be expected to prejudice seriously the outcome of the litigation. The directors are of the opinion that the claim can be successfully resisted by company.
Unless the possibility of any outflow in settlement is remote, for each class of contingent liability an entity shall disclose
a brief description of the nature of the contingent liability at the balance sheet date and, where practicable
an estimate of its financial effect an indication of the uncertainties related to
the amount or timing of any outflow the possibility of any reimbursement
Where inflow of economic benefits is probable, an entity should disclose:
a brief description of the nature of the contingent assets at the balance sheet date and, where practicable
an estimate of their financial effect
Capital/EquityFramework for Preparation and Presentation
of Financial StatementsIAS 1 Presentation of Financial StatementsIAS 32 Financial Instruments: Disclosure
and Presentation) IAS 39 Financial Instruments: Recognition
and Measurement)IFRS 7 Financial Instruments: DisclosuresIFRS 9 Financial instruments
Financial concept of capital
Capital is defined in monetary terms as the net assets or equity of the entity.
Financial capital maintenance.
Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of the net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period
Physical concept of capital Capital is defined in terms of physical
Physical capital maintenance.
Under this concept a profit is earned only if the physical productive capacity (or operating capacity) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period
Additional paid-in capital
Other comprehensive income
For each class of share capital: the number of shares authorized the number of shares issued and fully paid, and issued but
not fully paid par value per share a reconciliation of the number of shares outstanding at the
beginning and at the end of the period the rights, preferences and restrictions attaching to that
A description of the nature and purpose of each reserve within equity
An entity shall disclose the following, either in the statement of financial position or the statement of changes in equity, or in the notes
IAS 7 Statement of Cash Flows
• 1977 – IAS 7 Statement of changes in financial position required a a funds flow statement
• 1992 – revised IAS 7 Cash Flow Statements requires a cash flow statement as an integral part of the financial statements
• 2007 – the IASB amended the title of IAS7 from Cash Flow Statement to Statement of Cash Flows
Funds flow or cash flow ?An extract from the statement of financial position of ABC entity as at 31 December 20x8
Inventory 4300 4600
Accounts receivable 2600 1300
Cash 1200 2500
Accounts payable 6500 7900
Working capital 1600 500
Identify the change in funds.
Cash flow reporting
Information about the cash flows assist users
to determine the ability of an entity to generate cash
to understand the main differences between cash flow and profit reporting
to analyze investing and financing activities of the entity
CashComprises cash on hand and demand deposits with banks.
Cash equivalentsshort-term, highly liquid investments that are
readily convertible into known amounts of cash and
that are subject to insignificant amount of risks of changes in value
Generation of cash flowsOperating activities. Principal revenue producing activities of the entity and other activities that are not investing or financing activities.
Investing activities. Activities of the entity that relate to acquisition and disposal of long-term assets and other non-current assets other than those included in cash equivalents.
Financing activities. Activities that result in changes in the size and composition of the equity capital and borrowings of an entity.
Cash flows from operating activities(common examples)
Cash collections from sale of goods and rendering services
Cash receipts from other revenues (royalties, fees, commissions)
C a s h i n f l o w s
C a s h o u t f l o w s
Cash payments to supplies for goods and services
Cash payments to or on behalf of employees
Cash payments of income tax
Cash flows from investing activities(common examples)
Cash receipts from sale of PPE, intangibles and other long-term assets
Cash receipts from sales of equity and debt instruments of other entities
Cash advances and loans made to other parties
C a s h i n f l o w s
C a s h o u t f l o w s
Cash payments to acquire PPE, intangibles and other long-term assets
Cash payments to acquire equity and debt instruments of other entities
Cash receipts from the repayment of advances and loans made to other parties
Cash flows from financing activities(common examples)
Proceeds from issuance of share capital
Proceeds from issuing debt instruments (debentures)
Proceeds from bank borrowings
C a s h i n f l o w s
C a s h o u t f l o w s
Cash payments to owners to acquire or redeem the entity’s shares
Cash repayments of amounts borrowed
Repayment of principal portion of debt, including financial lease obligations
Interest and dividends
Interest paidDividends paid
Interest receivedDividends received
Operating or financing cash
Operating or investing cash
Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a statement of cash flows.
Non-cash activities are disclosed in the footnotes to financial statements.Common examples of non-cash activities:
conversion of debt (convertible debentures) to equity;
issuance of share capital to acquire property, plant and equipment…..
Format of the Statement of cash flows
Cash flows from operating activities A
Cash flows from investing activities B
Cash flows from financing activities C
Net change in cash and cash equivalents X
Cash and cash equivalents at the beginning of the period x
Cash and cash equivalents at the end of the period x
Direct versus indirect method of determining cash flows
Cash flows from operating activities
Direct method Indirect method
Cash flows from investing and financing activities
Direct method of determining net cash flows from operating activities This method presents items that affected cash flow and the amounts of those cash flows.
Entities using the direct method normally report the following major classes of cash receipts and cash payments:
Cash collections from customers
Interest and dividends received
Cash paid toward operating expenses
Payments to suppliers
Income tax paid
Indirect method of determining net cash flows from operating activities
Profit or loss is adjusted for the effects of:
changes during the period in inventories and operating receivables and payables;
non-cash items (depreciation, provisions etc.);
all other items for which the cash effects are investing or financing cash flows.
Components of cash and cash equivalents Non-cash transactions Cash flows from acquisitions and
disposals of subsidiaries and other business units
Cash flows arising from operating, investing and financing activities of each reportable segment