IAS 37 Provisions, Contingent

Liabilities and Contingent Assets

Definition

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

Present obligation

Legal obligation

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

Past event

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.

Provisions

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.

Onerous contracts

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

provision

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

Start

Present obligation as a result of an obligating event

Probable outflow?

Reliable estimate?

Provide

Possible obligation?

Remote?

Disclose contingent liability

Do nothing

Yes

Yes

Yes

No No

No

No (rare) No

Yes

Yes

Contingent assets

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

Disclosures

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

Examples: disclosures

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

Examples: disclosures

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.

Disclosures

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

Disclosures

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

productive capacity.

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

Shareholders’equity

Contributed (paid-in)capital

Earned capital

Share capital

Additional paid-in capital

Retained earnings

Reserves

Other comprehensive income

Related disclosures

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

class …..

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

Introduction

• 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

$000

31.12x8

$000

31.12x7

Inventory 4300 4600

Accounts receivable 2600 1300

Cash 1200 2500

8100 8400

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

Key definitions

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

flows

Operating or investing cash

flows

Non-cash transactions

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

Interest paid

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.

Disclosure

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

Other disclosures