Provisions and Contingencies

Objective A & B: Definitions and Classification

IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) provides the framework for recognising and disclosing uncertain obligations and potential assets.

Provision

A provision is a liability of uncertain timing or amount. It is recognised in the SFP when:

1. The entity has a present obligation (legal or constructive) as a result of a past event
2. It is probable (more likely than not) that an outflow of resources will be required
3. A reliable estimate can be made of the amount

Contingent Liability

A contingent liability is either:

• A possible obligation arising from past events whose existence will be confirmed by uncertain future events, OR
• A present obligation that does not meet the recognition criteria (not probable or cannot be reliably estimated)

Contingent liabilities are NOT recognised in the SFP — they are disclosed in the notes to the financial statements (unless the possibility of outflow is remote, in which case no disclosure is needed).

Contingent Asset

A contingent asset is a possible asset arising from past events whose existence will be confirmed by uncertain future events. Contingent assets are NEVER recognised — they are disclosed in the notes only when an inflow of economic benefits is probable.