IFRS – IAS 37: Provisions, contingent liabilities and contingent assets

The International Accounting Standards Committee (IASC) released International Accounting Standard 37 (IAS 37) to address the topic of provisions, contingent liabilities, and contingent assets. 

The objective at hand when creating this standard was to ensure that obligations due were being properly accrued for and communicated to those users of financial statements within footnote disclosures.  Included in this standard is the specifications that certain liabilities not be accrued unless they meet the specific criteria discussed within.  Specific criteria are laid out as follows, which must all occur:

  • payment is probable, defined as “more likely than not”
  • present obligation, legal or constructive, exists as a result of a past, obligating event
  • the amount can be estimated reliably

One distinction that should be made here is as follows:

  • Provisions are recorded when greater than 50% chance exists the event will occur.  These are record a liability on financial statements.
  • Contingent liabilities are when less than 50% chance exists the event will occur.  These are NOT recorded as a liability on the financial statements either because it cannot be reliably estimated or it is not probable.

IAS are principles based standards, rather than strict rules based standards that govern international accounting. IAS standards differ from IFRS standards in that they were introduced prior to 2001, whereas IFRS were produced after this date by the IASB, or the International Accounting Standards Board. When determining the hierarchy of these, the IAS is considered to be the building blocks in which the newer and more relevant IFRS are founded and therefore IFRS is more authoritative when these conflict.

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