The shortcomings of IAS 37

IAS 37, Provisions, Contingent liabilities and Contingent assets was issued in 1998, and at that time, it substantially improved financial reporting. Prior to its issue, there was significant scope for earnings manipulation. Which of the following statements is untrue as regards IAS 37?

Prior to the issue of IAS 37, entities could make provisions for future costs that were not present obligations

The recognition thresholds in IAS 37 are higher than in other IFRSs

IAS 37 only allows provisions, which meet the definition of a liability

Some provisions in IAS 37 are subject to structural uncertainty and some to existence uncertainty

An entity must recognise a provision where it is more likely than not that a liability exists; it is probable that an outflow of resources will be required to settle the liability and a reliable estimate can be made of the amount of the liability. Why have the recognition criteria in IAS 37 been the subject of debate?

The IASB is proposing to remove the probable outflows criterion from IAS 37

The IASB is proposing to make the standard consistent with other Standards

Preparers have questioned the probable outflows criterion

The IASB is proposing to make IAS 37 consistent with FASB Standards

IAS 37 partly defines a liability as a present obligation … arising from past events. The guidance given in IAS 37 as regards the identification of present obligations appears contradictory. Why is the guidance in IAS 37 as regards the identification of present obligations thought to be contradictory?

It is often unclear in practice how avoidable an obligation must be for it not to be recognised

Preparers have interpreted the guidance as the entity having a liability for past obligations that could have been avoided

If the liability can be avoided, then a liability is not recognised

The definition of a liability contradicts that in the Conceptual Framework

IAS 37 provides guidance to help interpret the definition of a liability where for example an obligation is not legally enforceable or is conditional on the future actions of the entity. How can the liabilities that fall within the scope of IAS 37 be distinguished from other liabilities?

Recognition does not use a cost and benefit criteria

IAS 37 uses lower thresholds than in other Standards

Generally they cannot be measured by reference to an observable current market price

There is normally an exchange transaction that provides a transaction price for the liability

The more-likely-than-not threshold applied in IAS 37 for recognising litigation liabilities is lower than the threshold applied in US GAAP. What are the practical implications of this difference in the recognition criteria?

Entities in the UK are concerned that valuable information is being given to the plaintiffs

There is likely to be an alignment of IFRSs and US GAAP in the near future

In the USA, entities recognise liabilities for litigation that they are currently engaged in

In the UK, entities recognise liabilities for litigation that they are currently engaged in

IAS 37 discusses how the best estimate of a liability can be determined. With large populations, the obligation is estimated by using a probability weighted expected value technique. How is the best estimate determined for a single obligation?

The most likely outcome may be the best estimate of the liability, but the entity considers other possible outcomes

The entity always uses expected value outcomes

The entity considers every possible outcome

The most likely outcome is the best estimate of the liability

Several existing IFRSs specify the types of costs that should be included in measuring an item. What is the guidance in IAS 37 as regards the costs to be included in the measurement of the liability?

IAS 37 states that provisions should include costs such as legal costs expected to be incurred in the settlement of a claim

IAS 37 states that provisions should include costs incurred in restructuring a business even if they can be avoided

IAS 37 states that provisions should not include costs such as legal costs expected to be incurred in the settlement of a claim

IAS 37 is completely silent

IAS 37 prohibits recognition of contingent assets, unless the realisation of income is virtually certain and so the threshold for recognition of contingent assets is higher than the probable outflows threshold for recognition of contingent liabilities. Why have entities been critical of the timing of recognition of contingent assets?

Defendants and plaintiffs treat court settlements as adjusting events

Plaintiffs and defendants often account for court settlements in the same manner

Defendants treat court settlements as non-adjusting events and plaintiffs as adjusting events

Plaintiffs and defendants often account differently for court settlements

IAS 37 states that where some or all of the expenditure required settling a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that the reimbursement will be received if the entity settles the obligation. What is the current problem with this requirement?

Establishing virtual certainty can be quite difficult

The measurement of the reimbursement

The assessment of the risk associated with the reimbursement

How to account for the time value of money

IAS 37 states that risks and uncertainty should be taken into account in reaching the best estimate of a provision. Which of the following statements is not true as regards IAS 37?

In the case of IAS 37, the risk adjustment would measure the amount that it would cost to be free of risk

IAS 37 does not identify the nature of the risk adjustment

IAS 37 sets out how to account for the credit risk of the entity

IAS 37 does not give any guidance on non-performance risk by the entity

The shortcomings of IAS 37

IAS 37, Provisions, Contingent liabilities and Contingent assets was issued in 1998, and at that time, it substantially improved financial reporting. Prior to its issue, there was significant scope for earnings manipulation. Which of the following statements is untrue as regards IAS 37?

IAS 37 provides guidance to help interpret the definition of a liability where for example an obligation is not legally enforceable or is conditional on the future actions of the entity. How can the liabilities that fall within the scope of IAS 37 be distinguished from other liabilities?

The more-likely-than-not threshold applied in IAS 37 for recognising litigation liabilities is lower than the threshold applied in US GAAP. What are the practical implications of this difference in the recognition criteria?

IAS 37 discusses how the best estimate of a liability can be determined. With large populations, the obligation is estimated by using a probability weighted expected value technique. How is the best estimate determined for a single obligation?

Several existing IFRSs specify the types of costs that should be included in measuring an item. What is the guidance in IAS 37 as regards the costs to be included in the measurement of the liability?

IAS 37 states that risks and uncertainty should be taken into account in reaching the best estimate of a provision. Which of the following statements is not true as regards IAS 37?

You scored

0

out of

0

Test passed. Enter your details to download your certificate. Your certificate will also be sent to you by email.

Our sites

Useful links

Using this site

Contact us

Planned system updates

The shortcomings of IAS 37

IAS 37, Provisions, Contingent liabilities and Contingent assets was issued in 1998, and at that time, it substantially improved financial reporting. Prior to its issue, there was significant scope for earnings manipulation. Which of the following statements is untrue as regards IAS 37?

IAS 37 provides guidance to help interpret the definition of a liability where for example an obligation is not legally enforceable or is conditional on the future actions of the entity. How can the liabilities that fall within the scope of IAS 37 be distinguished from other liabilities?

The more-likely-than-not threshold applied in IAS 37 for recognising litigation liabilities is lower than the threshold applied in US GAAP. What are the practical implications of this difference in the recognition criteria?

IAS 37 discusses how the best estimate of a liability can be determined. With large populations, the obligation is estimated by using a probability weighted expected value technique. How is the best estimate determined for a single obligation?

Several existing IFRSs specify the types of costs that should be included in measuring an item. What is the guidance in IAS 37 as regards the costs to be included in the measurement of the liability?

IAS 37 states that risks and uncertainty should be taken into account in reaching the best estimate of a provision. Which of the following statements is not true as regards IAS 37?

You scored

0

out of

0

Test passed. Enter your details to download your certificate. Your certificate will also be sent to you by email.

Related topics

Our sites

Useful links

Using this site

Contact us

Planned system updates