Lecture 16 - Provisions, contingent liabilities and assets (IAS 37). Until the issue of IAS 37 provisions, contingent liabilities and contingent assets, there was no accounting standard covering the general topic of provisions. This led to various problems. | Revise lecture 16 1 Provisions, contingent liabilities and assets (IAS 37) 2 Provisions The problem Until the issue of IAS 37 provisions, contingent liabilities and contingent assets, there was no accounting standard covering the general topic of provisions. This led to various problems. 3 Provisions Provisions were often recognised as a result of an intention to make expenditure, rather than an obligation to do so. Several items could be aggregated into one large provision that was reported as an exceptional item (the ‘big bath’). Inadequate disclosure meant that in some cases it was difficult to ascertain the significance of the provisions and any movement in the year. 4 Provisions A common example was on the appointment of a new management team to a business. On appointment the new management would set up large provisions for re-organisations (depressing profits), saying they were needed as a result of the actions of the previous management. Such depressed profits could therefore be blamed on that previous management team. 5 Provisions One or more years later the new management would ‘discover’ that not all those provisions were necessary. So they would be written back (enhancing profits), probably without any disclosure. So the profits under new management would look impressive, when in reality they had been created by the release of provisions charged in an earlier period. 6 Objective of IAS 37 The objective of IAS 37 provisions, contingent liabilities and contingent assets is to ensure that: Appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets Sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount 7 Provisions What is a provision? A provision is a liability of uncertain timing or amount A liability is a present obligation of the entity arising from past events, the settlement of which is expected to . | Revise lecture 16 1 Provisions, contingent liabilities and assets (IAS 37) 2 Provisions The problem Until the issue of IAS 37 provisions, contingent liabilities and contingent assets, there was no accounting standard covering the general topic of provisions. This led to various problems. 3 Provisions Provisions were often recognised as a result of an intention to make expenditure, rather than an obligation to do so. Several items could be aggregated into one large provision that was reported as an exceptional item (the ‘big bath’). Inadequate disclosure meant that in some cases it was difficult to ascertain the significance of the provisions and any movement in the year. 4 Provisions A common example was on the appointment of a new management team to a business. On appointment the new management would set up large provisions for re-organisations (depressing profits), saying they were needed as a result of the actions of the previous management. Such depressed profits could therefore .
