IAS 37

Provisions, Contingent Liabilities and

Contingent Assets
IAS 37

Beta S.p.A. signs an agreement with one of its top managers in order to pay him a lump sum
if the ownership of the company will change in the future.
QUESTION
According to IAS 37, is the company obligated to account a provision for this event?

Following a standard, one can se that contingent liability arises when (among other
situations) there is a possible obligation to be confirmed by a future event that is outside the
control of the entity. So, this particular event is only possible, thus it represents a contingent
liability to disclose in the notes to the financial statements.

A company has received 100 claims from customers. Each claim has the 40% of probability
to be closed without expenditures for the company, and 60% of probability to be settled with
an estimated outflow of 1 million per claim.
QUESTION
According to IAS 37, is the company obligated to account a provision for this event? If YES,
how much should be the provision?

Taking into consideration that an outflow of resources embodying economic benefits or

service potential required to settle the obligation is probable and the amount of the
obligation can be estimated reliably, the answer is YES.

The provision must be $100 million.

At the end of the 2010 fiscal year the Company EXAMPLE expects to pay in 2015 a
settlement for a claim for about 150.000 for the damages caused to an employee. The
discount rate is estimated to be 6% and the annual inflation rate 3%.
QUESTION
According to IAS 37, what is the present value of the obligation for the Company?

Real discount rate calculation = (1+DR)/(1+IR) = 2,91%

IR Inflation Rate = 3%
DR Discount Rate = 6%
Therefore, Present Value Payment of 150,000 is 129,942

Company Alfa closed its financial statements on December 31, each year. The company
decided to move its accounting principles to IAS/IFRS during the FY 2013. The financial
statements as of 31 December 2013 will be the first prepared according to IAS/IFRS. A
claim against the company was promoted by a client in march 2013 asking damages for a
total amount of Euro 1.5 million; management of the company think that the loss in the
claim is more probable that not. The company appointed its lawyers in order to discuss the
claim in front of the court. The lawyers of Alfa prepare a document for the board of directors
that summarizes the reasons of the company and estimates a probable transaction with the
client will cost about Euro 0.9 million to the Company; the document is completed on the
beginning of April 2014.

QUESTIONS
1) Generally speaking, is the event described above something that requires a provision
according to IAS 37?
Given the circumstances, the event is more probable than not, therefore it requires provision
in financial statements.

2) What is the Transition Date for the company?

The date would be January 1st, 2012

3) If the answer to question 1 is YES, according to IFRS 1 is the provision to be accounted

for retrospectively and, if YES, in what year?

As the information only became available during 2013, the answer is NO.

4) What is the correct amount to be accounted for the provision at the end of FY 2013
according to IAS/IFRS framework?
The amount is 1.5 /million as the information about the probable transaction become
available in FY 2014.

5)Are there additional bookkeeping to add after 31 December 2013? If YES, what
bookkeeping must be done?

Upon disclosure of new information, the provision must be corrected in FY 2014 by 0.6
million and is accounted in the profit & loss of Alfa as a gain.