IAS 37 regarding Provision, Contingent Liabilities and Contingent Assets defines PROVISIONS as liabilities of uncertain timing or amount.
Provisions can be distinguished from other liabilities such as trade payables and accruals because there is UNCERTAINTY about the timing or amount of the future expenditure required in settlement.
By contrast :
(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.
A PROVISION shall be recognised when :
- an entity has a present obligation (could be either legal obligation or constructive obligation) as a result of a past event;
- it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
- a reliable estimate can be made of the amount of the obligation
If these conditions are not met, no provision shall be recognised.
A legal obligation is an obligation that could :
- be contractual; or
- arise due to a legislation; or
- result from other operation of law
A constructive obligation, however, is an obligation that results from an entity’s actions where :
- by an established pattern of past practice, published policies, or a sufficiently specific current statement, the entity has indicated to other (third) parties that it will accept certain responsibilities; and
- as a result, the entity has created a valid expectation in the minds of those parties that it will discharge those responsibilities.
In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within the scope of IAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity (HRD).