Introduction

NZ IAS 37 addresses the recognition,
measurement and presentation of:




Provisions (excluding those covered by another
Standard, e.g. income taxes, leases, employee
benefits)
Contingent assets and liabilities
Restructuring provisions
Onerous contracts
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Provision
A provision is a subset of liabilities, defined as a liability of
uncertain timing or amount (para 10)
A liability is a present obligation arising from a past event that
is expected to result in an outflow of economic resources
(para 10 & NZ Framework)
A present obligation exists only where the entity has no
reasonable alternative but to settle the obligation
The obligation may be the result of law (e.g. legal contract)
or constructive, where there is valid expectation of
discharge of responsibilities based on an established
pattern of past practice.
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Distinguishing provisions from other
liabilities
 Typical provisions are for warranties, restoration,
restructuring or onerous contracts.
 Accrued liabilities are not provisions. (para 11)
 Provisions are disclosed in the financial
statements
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Contingent liabilities
Contingent liabilities are either a:
a) Possible obligation (confirmed by the occurrence, or
non-occurrence, of one or more uncertain future events
not wholly within the control of the entity) – e.g. a
guarantee on a loan for another entity; or
b) Present obligation (where it is not probable that an
outflow of economic resources will be required to settle
the obligation; or the amount cannot be measured
reliably) - e.g. a law suit where the amount of damages
is uncertain
Contingent liabilities are not recognised in the financial
statements (para 27) but must be disclosed in the Notes
to the financial statements (para 86)
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Contingent assets
 This is a possible asset arising from past events
whose 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 (para 10) e.g. a legal claim
where the outcome is uncertain
 Contingent assets are not recognised in the
financial statements (para 31) but are disclosed
in a Note if an inflow of economic benefits is
probable (para 89)
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Recognition criteria - Provisions
 All three following criteria must be met for a
provision to be recognised:
 An entity has a present obligation (legal or constructive) as
a result of a past event; and
 It is probable (i.e. more likely than not) that an outflow of
resources will be required to settle that obligation; and
 A reliable estimate can be made of the amount of the
obligation (para 14)
 If all these criteria are not met the provision cannot
be recognised (para 14)
 See the decision tree – Figure 5.2 p. 144
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Measurement of provisions
 “Best estimate” of provision amount
recognised. This requires professional
judgements and is calculated using ‘expected
value’ estimation and measured before tax
 Estimates should be discounted to present
value where material
 Due to the uncertainty involved, caution is
required to avoid overstatement
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Measurement cont’d
 Should account for expected cash outflows
only, disregarding any expected cash inflows
 Reimbursements must be virtually certain (not
just probable) to be recognised (para 53)
 Must review provisions at each balance sheet
date (para 59)
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Example
 ABC sells goods with a 3 year warranty. Warranty
provisions are calculated as a percentage of annual sales
based on historical data and are discounted to present
value using the government bond rate
 Relevant data is as follows:
End of
year
1
% of sales to be incurred as
warranty expenses
Discount
rate
2%
6.0%
2
3%
6.5%
3
5%
6.9%
10
 If total sales for the year ended 31 March 2013
were $2 million, calculate the total provisions for
warranties that should be set aside in relation to
31 March 2013 financial year sales.
End of
year
1
Expected cash outflow
Discount PV of cash
factor
outflow
1.06-1
37,736
2% x $2 mill = $40,000
2
3% x $2 mill = $60,000
1.065-2
52,900
3
5% x $2 mill = $100,000
1.069-3
81,859
Total PV of Future Cash Outflows
172,495
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Recognition & Measurement Rules
 Potential future operating losses must not be
recognised as provisions (para 63)
 If an entity has a contract that is onerous the present
obligation under the contract is recognised as a
provision (para 66)
 An onerous contract implies that the unavoidable cost
of meeting contract is more than anticipated benefits e.g. a manufacturer has entered into a contract for the
supply of goods at a price lower than the cost of
production
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Restructuring provisions
 These can be part of an acquisition of another business, in
which case NZ IFRS 3 covers this
 All other restructurings are covered in NZ IAS 37 and are
the most controversial aspect of the Standard
 Necessary conditions:
 Have a present obligation to restructure
 Costs must be directly and necessarily caused by the
restructuring
 A binding sale agreement is needed for the sale to be
deemed an obligation.
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Examples
 Restructuring provisions:
 Sale or termination of a line of business
 Closure of business locations in a country/region or
relocation of business activities from one region to
another
 Changes in management structure
 Reorganisations that have a material effect on the
nature and focus of the entity’s operations (para 70)
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Present obligation
 Present obligation is considered to arise when
the entity has a detailed plan identifying at least:
 The business (or part thereof) concerned
 The locations affected
 The employees affected
 The expenditures that will be undertaken
 The timing of implementation
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Restructuring - qualifying costs
 Only direct expenditure arising from the
restructuring can be included (para 80)
 Costs must be a necessary part of the
restructure and not associated with the ongoing
activities of the entity (para 80)
 Examples – costs of terminating leases and
other contracts; costs associated with employees
dismantling plant etc.; employee redundancy
costs
 Costs excluded are retraining or relocating
continuing staff; marketing or investment in new
systems and distribution networks (para 81)
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Disclosure for provisions
 Involves estimation and judgement
 Disclosure required of:
 Carrying amount at beginning and end of period
 Any additional provisions made in period
 Amounts used (incurred and charged)
 Unused amounts reversed in period
 Increase during period in discounted amount arising
from passage of time and the effect of any change in
the discount rate (para 84)
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Disclosure cont’d…
 Additionally a description of the nature of the
obligation, timing, uncertainties and any
expected reimbursement must be disclosed
(para 85)
Contingent Liabilities
 Contingent liabilities note is considered one of
the most important provided by a company
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