International Accounting Standard
Introduction
International Accounting Standard 37 or IAS 37 is a generally accepted accounting procedure which was passed in 1998 and approved by the International Accounting Standards Board or IASB. The primary purpose of IAS 37 is the measurement of provision, contingent liabilities and contingent assets and how they can be measured. It sets out guidelines for the manual and procedures regarding the disclosure of different types of provisions, contingent liabilities and contingent assets for any organisations. International Accounting Standard 37 has largely based itself on three principles which are, the liability of the entity has an obvious relation with some past events, a certain resource must be given away to discharge those liabilities and the obligations will be measured on parameter which are reliable and as p-er the Generally Accepted Accounting Principle (GAAP). There are certain discontinuations in the projects of accounting based on IAS 37, as the International Accounting Standards Board (IASB) has introduced specific changes in the policy. In this report, the scope of IAS 37, along with the characteristics, features and disclosure requirements of provisions, contingent liabilities and contingent assets are discussed.
Structure and contents (1350)
Scope of IAS 37
Following are the scopes of IAS37
Insurance contracts
Contracts which are made for insurance purposes and those which come under IFRS 4 are all covered under IAS 37.
Contracts regarding construction
Contracts which are made for construction purposes come under the scope of IAS 37. These types of contracts are included in IAS 11.
Non-onerous contracts
When a person takes a lease and pays for it even when he does not use it, the contract is called an onerous contract. Such contracts are excluded from the scopes of IAS 37, which covers the contracts which are not onerous in nature.
Income tax contracts
Income tax contracts are covered within the scopes of IAS 37. This includes payable income taxes and delayed income taxes. These obligations are covered under IAS 12.
Benefits of employees
The scope of IAS 37 covers the benefits of employees such as pensions, different allowances and claims.
Scopes of IAS 39
The scopes of IAS 37 include the majority of the scopes of IAS 39. The scopes of IAS 39 include the acknowledgement and calculation of assets and liabilities which are financial and purchasing and selling of non-financial components.
Provision
The provision means a liability where the time frame to discharge or pay the liabilities are not certain. There are mainly two kinds of liabilities which are critical components of provision. They are constructive liabilities and legal liabilities.
Constructive liabilities
Constructive liabilities include the obligations which are disclosed at the time of purchasing a product. When one buys a product, he is obliged to discharge these liabilities in the future. This kind of liability will make the responsible persons expect absolute acceptance of obligations which they will abide by.
Examples
- Warranty-related obligations
- cleanliness related obligations
- Repair or refunding obligations
Legal liabilities
This kind of liabilities includes obligations out of court cases. If one contracting person challenges the other for violating legal norms, they are mostly legal liabilities.
Example:
- Obligations resulted out of court cases.
- The obligations related to any aggrieved party which is not disclosing the regulatory standards.
The provisions which are counted within IAS 37 are,
Operating losses
Under this provision, no recognition of future losses is made. This is designed in such a way because there is no stipulated time frame for the obligation. Following is an example given to understand obligations relating to operating losses.
Example:
Any losses within the operations of a company can be counted as provision, as they are not previously estimated and bring substantial obligations for the company.
Onerous contracts
These kinds of legal obligations give rise to future uncertainties, and as a result, a provision of obligations rises.
Example:
When an individual or a company takes lease under a contract and even after the property against which the lease has been granted ceases to exist with its benefits for the taker of the lease, the contract can be termed as an onerous contract. These kinds of liabilities are considered as future ‘provisions’.
Cost restructure
When the costs are restructured, and obligations arise out of them, they are under constructive liabilities and covered by IAS 37.
Example:
If the salaries of the staff of a company rise, or some individuals are taken in the company for which huge packages are offered, they are signified as provisions. This kind of event pushes the company to raise its cost and a complete restructure in specific cases.
Contingent liabilities
Contingent liabilities are accounting principles within IAS 37 which deal with uncertain provisions and future obligations within the liabilities covered by the contract. Some of the key contingent liabilities covered by IAS 37 are
Probable obligations
These are the types of obligations which have started in the past and will be fulfilled in a given time in future. These types of obligations depend mainly on two factors. These types of obligations ensure that there is a probability of occurrence of the particular event in the future.
- These obligations do not require special provisions of funds to discharge them.
- No certain amount could be estimated for fulfilling this contingent liability.
Example:
All credit related liabilities can be called as probable liabilities for the company.
Possible obligations
This kind of liability refers to these obligations which are going to happen most possibly. This is where the action is almost certain to occur in future, and all possible arrangements are made with the possibilities of those occurrences. Under IAS 37, the possibility assessment is at least 50%.
Example:
Majority of the warranty and guarantee related liabilities can be called possible obligations under contingent liabilities as followed under the principles of IAS 37.
Example:
When a product is sold, the company estimates certain costs regarding its maintenance. These are calculated as possible liabilities under IAS 37. These liabilities have possibilities of more than 90%, and the cost is estimated and shown at the financial statement of the company.
Rare obligations
In such cases, the contingent liabilities may occur in the future, but the possibilities of those occurrences are rare or almost zero. The company does not present the details of such contingencies.
Example:
Let’s assume that the company is assured about the service duration of a specific product, yet the functions of the entire work have stopped. Then the company will bear extra cost for it, and discharge liabilities to fulfil its commitment. These type of obligations are rare in nature as the longevity of the products are already assured by the brand, and thus can also be called as remote liability.
Certain obligations
In such cases, the obligations have to be fulfilled mandatorily and are presented or disclosed in all forms of company statements. The duties to share profits with the shareholders are covered under toys type of contingent liability.
Operating liabilities
Let’s assume that company A has accounted for all its pre-ordained liabilities and estimated a total cost on that basis. Such liabilities can be payments related liabilities, where the company has to wait for fulfilment of payments after the sale of a particular product. Although, if company A finds out that specific extra cost has to be borne due to change in oil prices for communication purposes, that will be regarded as an operating loss among other contingent liabilities because no definite projection of that obligation was made earlier.
Contingent assets
This is a type of asset that means the company is gaining dome amounts on the basis of cash inflow which is about to happen in the future. These types of assets are recorded in the bank statements of the company as a resource which is gained, and cash is earned against it. Contingent assets can arise due to different reasons, such as
An improper estimation
- An unpredictable valuation in the economy and finances.
- An uncertain asset resulted out of performing specific tasks and not estimation of its probable outcomes.
Continent assets are earned due to some feature of the past but until they are earned, no estimation is made on behalf of those. Some examples are given below to analyse how contingent assets can be created in any company.
Legal compensations
When the company wins in lawsuits which are filed at court due to various infringements or other court victories, they gain certain assets. This is one of the key reasons for acquiring a contingent asset. In such cases the amount will be mentioned in the annual report and statements of the company, and after it is received in full, it will be treated as a fully-fledged asset.
Example of contingent assets
Court cases filed against a company
When court cases and lawsuits are filed by one company to another one, and as a result, some form of compensation is gained, they are fallen under the category of contingent assets. For example, if any company uses the product of another company without maintaining its patent-related norms, the second company may file a legal suit against the first company. The assets which will be gained as a compensation for the violation of laws and will be recorded as assets.
Legal violation by an individual
When a single individual attempt to violate any law which comes under the jurisdiction of the company and a lawsuit is filed against him or her, cash inflow may happen as recovery settlements. This is a type of income which may take place in the future, therefore can be rated as a contingent asset. This can be done under IAS 37.
Disclosure requirements (IAS 37 guidelines)
Provisions
The provisions of constructive liabilities like environmental liabilities, restructuring related liabilities, settlement related liabilities are disclosed in the most obvious manner in IAS 37. The provisions for warranty, guarantee and repayment related issues are mentioned with a probability of recovery and of expected value. All the disclosures are done on the exemption value of the present time and the risk of the provisions.
Contingent liabilities
All contingent liabilities should be disclosed according to Generally Accepted Accounting Principle (GAAP) under IAS 37. In the 86th paragraph of IAS 37, the disclosure requirements regarding contingent liabilities can be found. According to the standard accounting procedure, the liabilities which have rare chances of occurrence can be free from being disclosed. Generally, it can be said that if the resource outflow possibilities are higher than 5% or 10%, it will be regarded as a remote contingent liability and exclude the disclosure requirements of IAS37.
Contingent assets
The disclosure requirements are mentioned in the 89th paragraph of IAS 37. According to this principle, if the cash inflow generated by the contingent asset has a probability of 50%, the asset is mentioned in the footnotes of annual statements of the company, but does not feature in the financial statement. Only when the recovery of the asset is certain up to 90%, it is recorded in the statement of the company. The recording of the asset statements depends on the ability of recovery of the assets by the operative for the company. This is generally a rigorous process, and the company has to be cautious in asset recovery. All the record keeping and accounting activities are done according to the Generally Accepted Accounting Principle (GAAP).
Conclusion
The assessment of liabilities, assets and provision regarding the risk elements within an organisation is of utmost importance for any company. IAS 37 is an accounting-related guideline where the company measures the provisions, contingent liabilities and contingent assets of the company. IAS 37 has also outlined the factors which are required by the company at the time of disclosing their figures in the financial reports and recorded statements. This is followed in every accounting practice in companies all around the world. The risks about the recoverable assets and the service which the company has to provide at the time of discharging certain liabilities are well analysed, and their role in the functions of a company is also mentioned and described in detail in the guidelines of IAS 37. Since 2002 specific regulations regarding the accounting based on IAS 37 have been changed and alteration of policies have been observed, which has seen some stalling of ongoing accounting projects. These hindrances will be solved accordingly by competent accountants and board members of IASB.
Reference list
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