Provisions, Contingent Liabilities and Contingent Assets [Bangladesh Accounting Standard (BAS) 37]

2.  Objectives
 Scope
 Important Definitions
 Recognition
 Measurement
 Changes in Provisions
 Use of Provisions
 Reimbursement
 Disclosures

3. Objectives

4. BAS 37
Objectives
To prescribe the
criteria for
recognition and
measurement of
Provision
Contingent
Assets
Contingent
Liabilities
To prescribe the
criteria for using the
provision and
changes of provision
To prescribe the
disclosure
requirements

5. Scope

7. Important
Definitions

8. Accrual Concept:
Accrual concept of accounting implies that business
transactions should be recoded in the book of
accounts as and when it meets the recognition
criteria.
Matching concept:
Matching concept implies that expenses for a
particular period should be matched against the
revenues earned in that period to determine the
performance the of the business in that particular
period.

9. Provision
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.
Can
be ConstructiveLegal

10. A legal obligation is an obligation that
derives from:
(a) a contract (through its explicit or
implicit terms);
(b) legislation; or
(c) other operation of law.

11. A constructive obligation is an obligation that
derives from an entity’s actions where:
(a) by an established pattern of past practice,
published policies or a sufficiently specific
current statement, the entity has indicated to
other parties that it will accept certain
responsibilities; and
(b) as a result, the entity has created a valid
expectation on the part of those other parties
that it will discharge those responsibilities.

12. Entity ABC does not have a contract in
place that states that employees are
entitled to a bonus (in the form of a
13th cheque), however it has been the
entity’s practice for the last few years
to pay bonuses to employees in
December. Entity A has a constructive
obligation to pay bonuses that was
created due to its past practices.

13. A contingent liability is:
(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:
(i) it is not probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation; or
(ii) the amount of the obligation cannot be enasured
with sufficient reliability.

14. 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

15. The difference between provisions and other liabilities is
that there is uncertainty about the timing or amount
needed to settle the obligation. By contrast:
 Payables, where the goods and services have been
invoiced or formally agreed with the supplier; and
 Accruals, where the goods and services have been
received but have not been invoiced or formally agreed
with the supplier, including amounts due to employees.
Although the amount or timing may need to be
estimated, there is much less uncertainty involved.
Accruals should be reported as part of trade and other
payables, whereas provisions are reported separately in
the statement of financial position

16. Entity ABC’s leave policy states:
“If an employee does not take his/her leave
within one year of it accumulating to him/her,
the outstanding leave days will be paid out in
cash at the end of that year.”
In the above case, when the leave is accrued to
the employee, management is bound to
compensate (through its policy) the employee for
the leave. There is no uncertainty of timing or
amount. Economic benefits will flow out as a
result of this leave. This leave should be
accounted for as an accrual.

17. Entity ABC’s leave policy states:
“Any unused leave will be forfeited if not used
within six months after the annual leave cycle
has expired.”
In this case, timing is certain (within six months
after the annual leave cycle has expired), but the
amount may be uncertain (i.e. an estimate of the
leave that will be forfeited should be made in
measuring the liability). Management should use
its judgment in deciding whether the uncertainty
is more or less in measuring the liability, the
preceding is true, then the leave liability should
be recognized as a provision.

18. Recognition

19. When to recognize a provision?
Present obligation Probable outflow Reliable estimate
Recognize provision Either contingent liability
or
nothing

20. An entity in the oil industry causes contamination but cleans
up only when required to do so under the laws of the
particular country in which it operates. One country in which
it operates has had no legislation requiring cleaning up and
the entity has been contaminating land in that country for
several years. At 31 December 2015, it is virtually certain
that a draft law requiring a clean-up of land already
contaminated will be enacted shortly after the year end.
Is there a present obligation?
– The obligating event is the contamination of the land
because of the virtual certainty of legislation requiring
cleaning up.
Is there a probable transfer of economic benefits?
– Yes, probable.
Conclusion
- A provision is recognized for the best estimate of the costs
of the clean-up.

21. On 12 December 2015, the board of an entity decided to close down a
division making a particular product. On 20 December 2015 a detailed
plan for closing down the division was agreed by the board. Letters
were sent to customers warning them to seek an alternative source of
supply and redundancy notices were sent to the staff of the division.
Is there a present obligation as a result of a past obligating event?
– The obligating event is the communication of the decision to the
employees, which gives rise to a constructive obligation from that date
because it creates a valid expectation that the division will be closed.
Is there an outflow of resources embodying economic benefits in
settlement?
– Probable.
Conclusion
– A provision is recognised at 31 December 2015 for the best estimate
of the costs of closing the division.

22. Contingencies
Contingent
Liability
Contingent
Asset
Do not
recognize
but
disclose
Outflow
possible
(but not
probable)
Outflow
remote
Do not
recognize
and no
disclosure
Do not
recognize
but
disclose
Inflow is
probable
Nothing
In other
cases

23. Contingent liabilities should be
reviewed continuously to
determine if the outflow of
resources have become probable. A
provision is raised in the financial
statements in the period in which
the outflow of resources becomes
probable.

24. Entity A terminated the employment of one of
its employees. A few months after the
termination, the employee sued Entity A for
unfair dismissal. At reporting date, 30 June
2010, the attorneys of Entity A advised that
the entity will probably not be held liable.
There were some developments in the case
and by the next reporting date the attorneys
advised the entity that they will probably be
found liable.

25. Accounting treatment as at 30 June 2014
It is not probable that the entity will be liable
thus no provision will be made, however
there is a possible obligation due to a past
event (dismissal) that will only be confirmed
by the occurrence or non-occurrence of an
uncertain future event (outcome of the court
case). Hence the entity has to disclose a
contingent liability at 30 June 2014.

26. Accounting treatment at 30 June 2015
At this reporting date it is probable that the
entity will be liable and therefore a provision is
recognized. The provision will be measured as
the best estimate of the amount required to
settle the obligation.
Note that the provision recognized at 30 June
2015 will not be accounted for retrospectively,
i.e. by adjusting comparative figures as the
circumstances changed (new information came
to light) only in the current period.

27. Measurement

28. The amount recognized as a
provision should be the best
estimate of the expenditure
required to settle the
present obligation at the
reporting date.

29. The best estimate is normally the amount
that the entity would rationally pay to settle
the obligation or to transfer it to a third party
at reporting date. These estimates are
based on judgments by management
and these judgments are supported by
experience of similar transactions and, in
some cases, reports from independent
experts. Any events after reporting date
should also be considered and included.

30. Uncertainties surrounding the amount to be
recognized as a provision are dealt with by various
means according to the circumstances, for example:
 Where there is a continuous range of possible
outcomes, and each point in that range is as likely
as any other, then the midpoint of the range is
used; alternatively;
 Where the provision measured involves a large
population, the obligation is estimated by
weighting all possible outcomes by the associated
probabilities. This statistical method of estimation
is referred to as the “expected value”; and
 For a single item, the most likely outcome is the
best estimate.

31. For example, An entity sells goods with a warranty under
which customers are covered for the cost of repairs of any
manufacturing defects that become apparent within the
first six months after purchase. If minor defects were
detected in all products sold, repair costs would be Tk. 1
million. If major defects were detected in all products
sold, repair costs would be Tk. 4 million. The entity’s past
experience and future expectations indicate that, for the
coming year, 75 per cent of the goods sold will have no
defects, 20 per cent of the goods sold will have minor
defects and 5 per cent of the goods sold will have major
defects.
 The expected value of the cost of repairs is:
 (75% of nil) + (20% of 1m) + (5% of 4m) = Tk. 400,000

32. Changes in provision

33. Provisions shall be reviewed at the end of
each reporting period and adjusted to reflect
the current best estimate. If it is no longer
probable that an outflow of resources
embodying economic benefits will be required
to settle the obligation, the provision shall be
reversed.
Where discounting is used, the carrying
amount of a provision increases in each
period to reflect the passage of time. This
increase is recognized as borrowing cost.

34. Use of provision

35. A provision shall be used only for
expenditures for which the provision was
originally recognized.
Only expenditures that relate to the original
provision are set off against it. Setting
expenditures against a provision that was
originally recognized for another purpose
would conceal the impact of two different
events.

36. Reimbursement

37. Sometimes it happens that when a provision is
settled that some or all of the expenditure is to
be reimbursed by a third party. The
reimbursement should only be recognized, as
income and a corresponding asset, when it is
virtually certain that the reimbursement will be
received.
The amount recognized for the reimbursements
shall not exceed the amount of the provision.
In the statement of financial performance the
expense relating to the provision may be
presented net of the amount recognized as a
reimbursement.

38. Disclosures

39. For each class of provision, an entity shall
disclose:
(a) the carrying amount at the beginning and end
of the period;
(b) additional provisions made in the period,
including increases to existing provisions;
(c) amounts used (i.e. incurred and charged
against the provision) during the period;
(d) unused amounts reversed during the period;
and
(e) the increase during the period in the
discounted amount arising from the passage
of time and the effect of any change in the
discount rate.

40. An entity shall disclose the following for each class
of provision:
(a) a brief description of the nature of the obligation
and the expected timing of any resulting outflows
of economic benefits;
(b) an indication of the uncertainties about the
amount or timing of those outflows. Where
necessary to provide adequate information, an
entity shall disclose the major assumptions made
concerning future events; and
(c) the amount of any expected reimbursement,
stating the amount of any asset that has been
recognized for that expected reimbursement.

41. Unless the possibility of any outflow in
settlement is remote, an entity shall disclose
for each class of contingent liability at the
end of the reporting period a brief
description of the nature of the contingent
liability and, where practicable:
(a) an estimate of its financial effect
measured;
(b) an indication of the uncertainties relating
to the amount or timing of any outflow;
and
(c) the possibility of any reimbursement.

42. In extremely rare cases, disclosure of
some or all of the information required by
paragraphs 84–89 can be expected to
prejudice seriously the position of the
entity in a dispute with other parties on
the subject matter of the provision,
contingent liability or contingent asset. In
such cases, an entity need not disclose the
information, but shall disclose the general
nature of the dispute, together with the
fact that, and reason why, the information
has not been disclosed.

43. Any Questions?

44. Amin Siddiki FCA
44