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Green university of Bangladesh

Assignment

On

Financial Reporting

Topic name : provision, contingent liabilities and contingent asset.

Prepared for:

Md. kamruzzaman

Lecturer Financial Reporting

Department of Business Administration (DBA)

Green University of Bangladesh (GUB)

Date: Aug 13, 2014

Prepared by (youth Boomers Group):

Anqur Chowdhury-1106027(GL)

MD. Shipon Mia-1106060

Sheikh Mahbub Habib - 130106104

Dept. of Business Administration

Program: BBA (11th)

Green University of Bangladesh

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Table of content:SL No. Topic name Page No.

I. Letter of Transmittal 3

II. Acknowledgement: 4

III. Executive summary 5

IV. Introduction:6

V. Objective: 6

VI. Scope 6,7

VII.Definition of provision

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VIII. Recognition of Provisions 7

IX. Provisions and other liabilities 7

X. Obligations: 7,8,9XI. Measurement of provisions: 9,10

XII. Restructurings 10

XIII. Use of provisions 10

XIV. Definition of Contingent liability 11

XV. Relationship between provisions and contingent liabilities: 11

XVI. This Standard distinguishes between 12

XVII. When to Recognize a Contingent Liability 12

XVIII. Contingent assets 13

XIX. Disclosures: 13,14

XX. Accounting for contingent liabilities 14

XXI. Accounting for contingent Assets 14

XXII. The accounting treatment can be summarized in a table 15

XXIII. Disclosure of contingencies: 15

Letter of Transmittal

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Aug 13, 2014Md. kamruzzaman

Lecturer, Financial Reporting

Department of Business Administration (DBA)Green University of Bangladesh (GUB)

Subject: Submission of an assignment.

Dear Sir,

I gladly present to you the assignment titled ‘provision, contingent liabilities and contingent asset’. I have made the assignment as you give me to do by help of your lecture sheet and internet.

I believe the knowledge and experience I gathered during the assignment will be extremely helpful in my future academic life and professional life. I will be grateful to you if you accept the assignment.

Your support in this regard will be highly appreciated.Thanking you.

___________________Anqur Chowdhury (GL)

ID: 110106027

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Acknowledgeme nt :

At the beginning, I would like to express my sincere gratitude to Almighty, the most merciful And beneficial for empowering me to prepare the assignment within the scheduled time.

I also want to thank especially to my kamruzzaman Sir for his inspiring guidelines, valuable suggestion, constructive criticism and constant help throughout the work and in preparation of this assignment.

I also express my warm gratitude and cordial thanks to All of my group member who have given me the opportunity to work with them and helped a lot by providing the information and enabling me to prepare this assignment. I have received their generous help and support.

I would like to take the opportunity to express my wholehearted gratitude to my fellow friends, near and dear ones who offered encouragement, information, inspiration and assistance during the course of constructing this assignment.

Executive summary :

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A liability is a present obligation arising from an entity’s past actions or events, then settlement of which an entity expects will re salt in the outflow of economic benefits or service potential from the entity.

A liability arises because something has happened in the past (an obligating event), which creates an obligation for the entity, and which it has no realistic alternative but to settle or fulfill. Obligating events arise either out of a legal obligation (contractual or statutory

Obligations, or common law) or a constructive obligation (an entity’s established pattern of past practices and those actions create a valid expectation that the entity will act in the same way in future).

Liabilities are generally recognized when a present obligation exists, it is probable that there will be an outflow of resources from the entity, and a reliable estimate can be made of the amount of the obligation.

Where liabilities meet these criteria but only the timing and amount of the outflow are uncertain, an entity recognizes a provision in its financial statements. Where the entity is unsure that a present obligation exists, or where the outflow of resources is not probable, or the amount of the outflow cannot be reliably determined, a contingent liability is disclosed in the notes to the financial statements.

Provisions are measured at the amount (best estimate) that the entity would rationally pay to settle the obligation or to transfer it to a third party at the reporting date. The best estimate should take into account any risks and uncertainties related to the outflows and any reimbursements due from external parties. Gains from the disposal of assets are not included in the measurement of a provision. Where the effect of time value of money is material, the provision should be the present value of the expenditures expected to be required to settle the obligation.

An entity should review its provisions at least at every reporting date, and adjust the Amount of the provision to the current best estimate. Changes in the measurement of the liability resulting from either a change in estimated timing or amount of the outflow of resources, or a change in the discount rate should result in an adjustment to the liability already recognized.

Provisions can only be used for their original purpose. If provisions are no longer Required they should be reversed.

Introduction:

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International Accounting Standard 37: Provisions, Contingent Liabilities and Contingent Assets, or IAS 37, is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It sets out the accounting and disclosure requirements for provisions, contingent liabilities and contingent assets, with several exceptions, establishing the important principle that a provision is to be recognized only when the entity has a liability.

IAS 37 was originally issued by the International Accounting Standards Committee in 1998, superseding IAS 10: Contingencies and Events Occurring after the Balance Sheet Date, and was adopted by the IASB in 2001. It was seen as an "important development" in accounting as it regulated the use of provisions, minimizing their abuse such as in the case of big baths.

Objective: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

Scope :

1. This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and Contingent assets, except:

(a) Those resulting from executor contracts, except where the contract is onerous; and

(b) Deleted

(c) Those covered by another Standard.

2 This Standard does not apply to financial instruments (including guarantees) that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement.

3 Executor 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 .Executor contracts unless they are onerous

4. Some amounts treated as provisions may relate to the recognition of revenue, for example where an entity gives guarantees in exchange for a fee. This Standard does not address the recognition of revenue. IAS 18Revenue identifies the circumstances in which revenue is recognized and provides practical guidance on the application of the recognition criteria. This Standard does not change the requirements of IAS 18.

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5. 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.

Definition of provision :

A provision is a liability of uncertain timing or amount.

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.

Recognition of Provisions :

A provision shall be recognized when:

(a) An entity has a present obligation (legal or constructive) as a result of a past event;

(b) It is probable that an outflow of resources embodying economic benefits will be required toSettle the obligation; and

(c) A reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognized.

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Provisions and other liabilities:

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:

(a) Trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and

(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.

Obligations:

A provision may be necessary as a result of

A legal or, A construction obligation

Legal obligation:

A legal obligation is an obligation that derives from:

A contract Legislation Other operation of law

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Constructive obligation :

A constructive obligation is an obligation that derives from an entity’s actions where:

By an established pattern of past practice, published polices 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.

Measurement of provisions:

The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. [IAS 37.36] This means:

Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount. [IAS 37.40]

Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value. [IAS 37.39]

Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability. [IAS 37.45 and 37.47]

In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events. [IAS 37.42]

If some or all of the expenditure required settling a provision is expected to be reimbursed by another party, the reimbursement should be recognized as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognized should not exceed the amount of the provision. [IAS 37.53]

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In measuring a provision consider future events as follows:

forecast reasonable changes in applying existing technology [IAS 37.49] ignore possible gains on sale of assets [IAS 37.51] consider changes in legislation only if virtually certain to be enacted [IAS 37.50]

Restructurings:

A restructuring is: [IAS 37.70]

sale or termination of a line of business closure of business locations changes in management structure Fundamental reorganizations.

Restructuring provisions should be recognized as follows: [IAS 37.72]

Sale of operation: recognize a provision only after a binding sale agreement [IAS 37.78] Closure or reorganization: recognize a provision only after a detailed formal plan is

adopted and has started being implemented, or announced to those affected. A board decision of itself is insufficient.

Future operating losses: provisions are not recognized for future operating losses, even in a restructuring.

Restructuring provision on acquisition: recognize a provision only if there is an obligation at acquisition date [IFRS 3.11]

Restructuring provisions should include only direct expenditures necessarily entailed by the restructuring, not costs that associated with the ongoing activities of the entity. [IAS 37.80]

Use of provisions:

Provisions should only be used for the purpose for which they were originally recognized. They should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources will be required to settle the obligation, the provision should be reversed. [IAS 37.61]

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Definition of Contingent liability:

a possible obligation depending on whether some uncertain future event occurs, or at present obligation but payment is not probable or the amount cannot be measured

reliably

Contingent liabilities:

A contingent liability is as flows:

(a) 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 the control of the entity; or

(b) A present obligation that arises from 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.

An entity should not recognize a contingent liability. An entity should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.

Relationship between provisions and contingent liabilities:

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 recognized 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.

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This Standard distinguishes between:

(a) Provisions – which are recognized as liabilities (assuming that a reliable estimate can be made because they are present obligations and it is probable that an outflow of resources embodying Economic benefits will be required to settle the obligations; and

(b) Contingent liabilities – which are not recognized as liabilities because they are either:

(i) Possible obligations, as it has yet to be confirmed whether the entity has a presentObligation that could lead to an outflow of resources embodying economic benefits; or

(ii) Present obligations that do not meet the recognition criteria in this Standard (becauseEither it is not probable that an outflow of resources embodying economic benefits will beRequired to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made)..

When to Recognize a Contingent Liability:

There are three scenarios for contingent liabilities, all involving different accounting treatments. They are:

Record a contingent liability when it is probable that the loss will occur, and you can reasonably estimate the amount of the loss. If you can only estimate a range of possible amounts, then record that amount in the range that appears to be a better estimate than any other amount; if no amount is better, then record the lowest amount in the range. “Probable” means that the future event is likely to occur. You should also describe the liability in the footnotes that accompany the financial statements.

Disclose the existence of the contingent liability in the notes accompanying the financial statements if the liability is reasonably possible but not probable, or if the liability is probable, but you cannot estimate the amount. “Reasonably possible” means that the chance of the event occurring is more than remote but less than likely.

Do not record or disclose the contingent liability if the probability of its occurrence is remote.

Examples of contingent liabilities are the outcome of a lawsuit, a government investigation, or the threat of expropriation. A warranty can also be considered a contingent liability.

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Contingent assets:

An entity shall not recognize a contingent asset. Contingent assets are not recognized in financial statements since this may result in the

recognition of income that may never be realized. However, when the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

Contingent assets are not recognized in financial statements since this may result in the recognition of income that may never be realized. However, when the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is probable.

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 recognized 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.

Disclosures:

Reconciliation for each class of provision: [IAS 37.84]

Opening balance Additions Used (amounts charged against the provision) Unused amounts reversed Unwinding of the discount, or changes in discount rate Closing balance

Prior year reconciliation is not required. [IAS 37.84]

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For each class of provision, a brief description of: [IAS 37.85]

Nature Timing Uncertainties Assumptions Reimbursement, if any.

Accounting for contingent liabilities :

Contingent liabilities:

Should not be recognized in the statement of financial position itself Should be disclosing red in a note unless the possibility of a transfer of economic benefits

is remote.

Accounting for contingent assets:

Contingent assets should not generally be recognized but if the possibility of inflows of economic benefits is problem. they should be disclosed

If a gain is virtually certain. if falls within the definition of an asset and should be recognized as such. Not as a contingent asset.

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The accounting treatment can be summarized in a table:

Degree of probability of an outflow/inflow of resources

Liability Asset

Virtually certain Provide RecognizeProbable Provide Disclose by notePossible Disclose by note No disclosureRemote No disclosure No disclosure

Disclosure of contingencies:

The principal disclosure requirements regarding contingencies are:

The nature of the contingency The uncertainties expected to affect the ultimate outcome. An estimate f the potential effect.