Chapter 18
Tuesday, September 12, 2023 7:41 PM
Lets Recap ! Definition of a provision:
What is a Liability ? A provision is a liability of uncertain timing or amount (see IAS 37.10).
A liability is defined in IAS 37 as 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 In simple terms , a provision is a liability in respect of which uncertainty exists over the
economic benefits (see IAS 37.10). point of time (when) of payment or the amount (how much) that must be paid. In the first
place, a provision has to satisfy the definition of a liability.
The essential characteristic of a liability is that it is a present obligation that arose from
events that have already occurred (past event) which will result in the transfer of economic Initial recognition and measurement
resources. The following are examples of historical events that could lead to the origin of
items that meet the definition and recognition of a liability: A provision can only be recognised when:
1.an entity has a present obligation (legal or constructive) on the reporting date as a result
- A purchase contract for the purchase of an asset on credit (must be a written contract in of a past event (this means that the definition of a liability has to be satisfied); and
respect of property).
- A purchase contract (written or oral) to obtain a service. 2.it is probable (more likely than not, i.e. probability > 50%, the probability of occurrence >
-A loan agreement (must be a written contract). the probability of non-occurrence) that an outflow of resources embodying economic
-A lease agreement (must be a written contract). benefits will be required to settle the obligation; and
Recognition criteria of a liability 3.a reliable estimate can be made of the amount of the obligation (see IAS 37.14).
As a result, according to IAS 37.14(b) and (c) an item that If these requirements are not met, a provision cannot be recognised.
meets the definition of a liability should be recognised (recorded) in the financial records if:
1.it is probable that an outflow of resources embodying economic benefits will result from
the settlement of the present obligation; and
2.the amount at which settlement will take place can be measured reliably.
With regard to the recognition of a liability:
- ‘probable’ means more likely than not, therefore the probability is > 50% (see IAS 37.23);
and
- ‘measured with reliability’ means measured at the historical cost price thereof (see IAS
37.25). In the case of the credit purchase of an asset or a service, the historical cost of a
liability is the invoice price and with regard to a loan incurred, it is the amount received.
-The date on which a liability is recognised is the date on which the requirement of the first
recognition criterion, namely that the outflow of economic benefits is probable, is usually
satisfied.
Subsequent measurement of A Provision
Derecognition of provisions
When the obligation in respect of which a provision was made is settled,
the provision must be derecognised. The settlement can occur at the amount
of the provision or at a lower or at a higher amount.
A provision may be used only in respect of the expenditure for which the provision was
originally recognised. Unused amounts of the provision must be reversed (see IAS 37.59
and .61).
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