The shortcomings of IAS 37

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. 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?

  2. 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?

  3. 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?

  4. 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?

  5. 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?

  6. 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?

  7. 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?

  8. 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?

  9. 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?

  10. 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?