Accounting for Provisions, Contingent Liabilities and Contingent Assets (IAS 37) (2024)

FAQs

What is contingent liability according to IAS 37 provisions contingent liabilities and contingent assets? ›

IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable) ...

The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.

Provisions are recognized on the balance sheet, while contingent liabilities are typically disclosed in the footnotes or other financial statement disclosures. When are provisions recorded? Provisions are recorded when there is a present obligation, it is probable, and the amount can be reasonably estimated.

IAS 37 requires that a provision is only recognised where: there is a legal or constructive present obligation as a result of a past event, and. payment is probable, and. the amount can be reliably estimated.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

Contingent liabilities are recorded to ensure that the financial statements are accurate and meet requirements of generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). GAAP recognizes three categories of contingent liabilities: probable, possible, and remote.

Provision liability reduces an asset's value because of a present obligation arising out of a past event. Contingent liability is a potential liability that can occur at a future date due to events beyond a company's control. The event which can result in a provisional liability may or may not occur.

Contingent liabilities may include litigation, warranties, insurance claims, and bankruptcy. Two FASB recognition requirements must be met before declaring a contingent liability. There must be a probable likelihood of occurrence, and the loss amount is reasonably estimated.

These obligations are often referred to as 'make good'. The most common example is contained within a building lease agreement, whereby the leasee agency is required, as per the contract, to restore the premises to its original condition at the conclusion of the lease.

Assuming that the loss contingency is “probable” and can be reasonably estimated, then a journal entry should be recorded to accrue the liability. The journal entry would be to debit legal expense and credit to record the legal liability.

How do you treat contingent liabilities in accounting? ›

Contingent liabilities are never recorded in the financial statements of a company. These obligations have not occurred yet but there is a possibility of them occurring in the future. So a contingent liability has no accounting treatment as such. Now such contingent liabilities have to be reviewed on a yearly basis.

Description: A contingent liability is a liability or a potential loss that may occur in the future depending on the outcome of a specific event. Potential lawsuits, product warranties, and pending investigation are some examples of contingent liability.

IAS 37 stipulates the criteria for provisions which must be met for a provision to be recognised so that companies are prevented from manipulating profits. According to IAS 37, three criteria are required to be met before a provision can be recognised. These are: There needs to be a present obligation from a past event.

IAS 37 defines liabilities as present obligations. It identifies warranties and guarantees as liabilities. However, it does not explain why warranties and guarantees—which are contingent on the occurrence or non-occurrence of future triggering events—are present obligations.

Contingent assets are assets dependent on non-operating assets' performance. For example, a tract of land used for farming could be classified as a contingent asset. The value of the land is determined by the crops produced and sold. If the crops are good, the value will increase; it will decrease if they're not good.

Description: A contingent liability is a liability or a potential loss that may occur in the future depending on the outcome of a specific event. Potential lawsuits, product warranties, and pending investigation are some examples of contingent liability.

Contingent Liability. A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event.

Contingent liabilities are obligations that will become liabilities if certain events occur in the future. To be a contingent liability, it must be possible to estimate its value and have more than a 50% chance of being realized.