IAS 37 Provisions, Contingent Liabilities and Contingent Assets

We create provisions as a charge against profit so as to meet the loss or decrease in the asset’s value. It is a liability that one can measure with a substantial degree of estimation. Real liabilities payable from an existing appropriation must be recognized at year-end even though the amount may be estimated in whole or part.

A contingent liability has to be recorded if the contingency is likely and the amount of the liability can be reasonably estimated. Both GAAP and IFRS require companies to record contingent liabilities. A contingent liability is a potential loss that may occur at some point in the future, once various uncertainties have been resolved. This liability is not yet an actual, confirmed obligation. The exact status of a contingent liability is important when determining which liabilities to present in the balance sheet or in the attached disclosures. It is of interest to a financial analyst, who wants to understand the probability of such an issue becoming a full liability of a business, which could impact its status as a going concern.

Contingent Liabilities

As part of the year-end closing instructions, an information request should be sent to each office/mission requesting details of any significant occurring events after the reporting date. An addendum of examples of typical events after the reporting date can also be included within the closing instructions to assist staff in identifying such events. As the contingent liability is for disclosure purposes only, no entries are required. Amount contingent liabilities noted above would be reported by OLA via provisions reporting template which then would serve as a basis for provisions note disclosure compilation. And since remaining balance of USD 500,000 is already reflected in the OLA y/e submission , there is no need to book an entry of USD 500,000 as noted above. If a provision is discounted upon initial recognition, the discount must be ‘unwound’ at the end of each subsequent reporting period.

The sections below describe in detail the procedures required to enter these transactions into Umoja, using the example of a legal case handled by the OLA to illustrate the accounting entries required. Any proceeds anticipated from the disposal of assets to be used in settlement of the obligations should not be taken into account when measuring a provision. The lawsuit was considered a contingent liability in the books of Samsung ltd, with an estimated value of $700 million. Contingent LiabilityContingent Liabilities are the potential liabilities of the company that may arise at some future date as a result of a contingent event that is beyond the company’s control.

How to Avoid Contingent Liabilities

There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote. Insurance ClaimsAn insurance claim refers to the demand by the policyholder to the insurance provider for compensating losses incurred due to an event covered by the policy. The company either validates or denies the claim based on their assessment and nature of the incurred losses. Which of the following is a contingency that would most likely require accrual? Potential liability on a product where none have yet been sold.

Remote losses typically do not require disclosure in your financial statements. If a loss is reasonably possible, you would add a note about it to the company’s financial statements.

Low Probability of Loss

Often, the longer the span of time it takes for a contingent liability to be settled, the less likely that it will become an actual liability. The materiality principle states that all important financial information and matters need to be disclosed in the financial statements. An item is considered material if the knowledge of it could change the economic decision of users of the company’s financial statements. Both GAAP and IFRS require companies to record contingent liabilities, due to their connection with three important accounting principles. When the future events will possibly occur and the amount can be reasonably estimated. An example might be a hazardous waste spill that will require a large outlay to clean up. It is probable that funds will be spent and the amount can likely be estimated.

Detailed guidance on the process of raising of manual and reversing JVs can be found in section 3.2of General Ledger Chapter. On receipt of this information, the Accounts Division will then review to ensure that it is accurate and complete, and supported by relevant documentation. Once expenses have been identified, the Accounts Division should ensure that these expenses are relevant to the provision raised. Detailed guidance on the process of raising manual and reversing JVs can be found in section 3.2of the General Ledger Chapter.