IAS 37 and FRS 102 s21 apply to provisions, contingent liabilities, and contingent assets. They establishe the principles and rules for the recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets in the financial statements.
Provisions
Provisions are liabilities that are recognized in the financial statements when it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability. Examples of provisions include warranty claims, restructuring costs, and legal claims.
An entity shall recognise a provision only when:
(a) the entity has an obligation at the reporting date as a result of a past event;
(b) it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; and
(c) the amount of the obligation can be estimated reliably.
The recognized provision is recorded as a liability in the balance sheet, and the expense is recognized in the income statement.
Contingent liabilities
Contingent liabilities are potential liabilities that are not recognized in the financial statements unless it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability. Examples of contingent liabilities include legal claims, environmental liabilities, and guarantees.
Contingent liabilities are not recognized in the financial statements unless it is probable that an outflow of economic resources will be required to settle the liability, and the amount of the liability can be estimated with sufficient reliability (ie its a provision). If the contingency is not probable or the amount cannot be estimated with sufficient reliability, the contingent liability is disclosed in the notes to the financial statements.
Contingent assets
Contingent assets are potential assets that are not recognized in the financial statements unless it is probable that an inflow of economic resources will be received, and the amount of the asset can be estimated with sufficient reliability. Examples of contingent assets include litigation recoveries, insurance claims, and tax refunds.
Contingent assets are not recognized in the financial statements as assets can only be reocgnised if the flow of future economic benefits is virtually certain.
Disclosure of a contingent asset is required when an inflow of economic benefits is probable.
Disclosures
The standards also require disclosures in the financial statements to provide information about the nature, timing, and amount of the provisions, contingent liabilities, and contingent assets. The entity should disclose the carrying amount of the provisions, the changes in the carrying amount of the provisions, and any significant assumptions used in estimating the provisions. The entity should also disclose the nature, timing, and amount of the contingent liabilities and contingent assets, and any changes in the likelihood or the amount of the contingent liabilities and contingent assets.
If there is an ongoing court case the full disclosure about contingent liabilities may be seriously prejudicial, so it may be possible to make limited disclosures.
