Question

1. IAS 37 ensures 'consistency between entities in the recognition and measurement of provisions and contingencies and that sufficient information is disclosed about them to users so that they can understand their effect on current and future results' Discuss

Answer 1

IAS 37 deals with the recognition of a contingent asset or a liability in the financial statements based on economic outflow or inflow for the entity. It clearly distinguishes between what a provision is and how a contingent liability has to be disclosed in the financial statements. A provision is created when the event is certain of happening i.e. the liability will be incurred but the business is unsure of the amount or timing , hence an estimated amount is set aside for a known liability. However in case of a contingent liability is a possible obligation that will occur on the happening or not happening of a particular event. IAS 37 mentions clearly the fact as to when the company has to treat an event as a contingent liability and when it has to be account for a provision. A contingent liability is only disclosed in the books of accounts when the economic outflow of benefits is probable but a reliable estimate cannot be made. A provision is recorded in the books when both the event is highly probable and the economic outflow can be measured with reliable estimates. This demarcation helps users understand the differences between a provision and a contingent liability that are mentioned in the financial statements.