What are provisions and contingent liabilities?

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What are provisions and contingent liabilities?

A provision is a liability recognized for a legal or constructive obligation arising from a past event if there is a probable outflow of resources and the amount can be estimated reliably and for which the exact amount or timing of an expenditure is uncertain but whose existence is certain and not contingent on future events.  Its recognition is required if:

  1. The entity has a present or future obligation as a result of a past event;
  2. It is probable that an outflow of resources will be required for settlement; and
  3. The amount of the obligation can be reliably estimated.

If an obligation meets the test for recognition, it is deemed to be probable, and a provision is required to be recognized in the financial statements for the period.

Provisions – US GAAP vs. IFRS
US GAAP IFRS
Definition of Probable Loss “Likely”: > 70% chance of occurring “More likely than not”: > 50% chance of occurring
Minimum Amount of Recognition Minimum in range of equally probable outcomes Midpoint in range of equally probable outcomes
Discounting of the Liability for its Time Value Generally prohibited Required

A potential obligation whose existence is uncertain and dependent on the occurrence or nonoccurrence of one or more future events to determine the amount payable, the payee, the date payable or even the liability’s actual existence is a contingent liability.  A contingent liability is either:

  • A possible obligation that has arisen from a past event, the outcome of which will be confirmed only on the occurrence or nonoccurrence of one or more uncertain future events that are not fully within the firm’s control; or
  • A present obligation due to a past event but that is not recognized either because it is unlikely that an outflow of resources will be required for settlement or the amount cannot be measured with sufficient reliability.

Generally, disclosure is made in the notes to the annual report of those contingent liabilities that involve more than a remote possibility of an outflow of resources stating:

  1. The nature of the contingency; and
  2. An estimate of the possible loss, its range, or that an estimate cannot be made.

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2018-10-29T16:32:44+00:00

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