IAS 37– Provisions and Contingents
Objective: To prescribe recognition and measurements for contingent liabilities and contingent assets, ensure that sufficient information is disclosed in the note to the financial statements. IAS 37 ensures that only genuine obligations are dealt with the financial statement. An entity should recognize a provision as liabilities or Assets only when a past event has created a legal or constructive obligation that is probable, and the amount of obligation can be estimated reliably. Amount recognized as a provision liabilities the best estimated of settlement amount at the balance sheet date. Each balance sheet date requires adjusting the amount that recognized. Disclosures, including description and amounts are required for each class of provision.
Contingent Liability arise when
1. There is a possible obligation to be confirmed by future event that is outside of the control of the entity.
2. A present obligation may, but probably will not, require an outflow of resources.
3. A sufficiently reliable estimate of the amount of a present obligation cannot be made.
Contingent liabilities require discloser only and not recognition of the amount. When the possibility of outflow is remote, then no disclosure require to contingent liabilities or assets. Contingent assets arises when the inflow of economic benefit is probable, contingent assets require disclosure only, If income from assets is certain then the assets is not contingent assets.
The Differences and Similarities between US GAAP Law and IFRS
Similarities: both US GAAP and IFRS are
Significant Differences:
IFRS | US Law GAAP | |
A provision is recognize for legal or constructive obligation arising from past event, if there is a "probable" outflow of resources and the amount can be estimated reliably "Probable" – means in this context more likely than not. | Unlike IFRS a contingency (provision) is recognized if it is probable that a liability has been incurred and the amount can be estimated reasonably However unlike IFRS "Probable" - means in this context likely to occur. | Recognition |
IFRS | US Law GAAP | |
Unless the fair value of an obligation is observable in the market, a provision is measured at the "best estimate" of the expenditure to be incurred. | Unlike IFRS a recognized contingency is measured using a "reasonable estimate" Under other standards obligation that provisions under IFRS are measured at fair value. | Provision or contingency estimation |
Provisions are discounted if the effect of discounting is material. - Material מהותי | Unlike IFRS recognized contingencies are not discounted except in limited cases in which case specific requirement apply | Discount of Provision |
Reimbursement is recognized when it virtually certain the amount of the provision is reimbursed. | Unlike IFRS a reimbursement is recognized when recovery is probable. | Reimbursement Right |
A provision is not recognized for future operating losses. | Like IFRS a provision is not recognized for future operating losses. | Provision for future operating Loss |
A provision for restructuring costs is not recognized until there is a formal plan and detail of the restructuring is presented. | Like IFRS a provision for restructuring costs is not recognized until there is a formal plan and detail of the restructuring is presented. | Provision for restructuring |
Provision are not recognized for the repair or maintenance of own assets or for self insurance. | Provision are not recognized for the repair or maintenance of own assets or for self insurance. | Provision on self owned asset |
IFRS do not specifically say that if provision for contract termination costs allowed. | Unlike IFRS for contract termination costs related to a restructuring a liability is recognized only when the contract has been terminated pursuant to its terms. | Provision for termination of Contracts |
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