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| International Accounting standard(IAS) |
What is the International Accounting Standards (IAS-37)? Describes in short:
IAS 37 (International Accounting Standard 37) is a standard issued by the International Accounting Standards Board (IASB) that provides guidance on provisions, contingent liabilities, and contingent assets. It establishes the criteria for recognizing, measuring, and disclosing these items in financial statements to ensure that financial information is relevant and reliable.
Key aspects of IAS 37 include:
1.Provisions:
A provision is a liability of uncertain timing or amount. IAS 37 requires a provision to be recognized when:
There is a present obligation (legal or constructive) as a result of a past event.
It is probable that an outflow of resources (such as cash) will be required to settle the obligation.
The amount of the obligation can be reliably estimated.
Provisions should be measured at the best estimate of the expenditure required to settle the present obligation at the reporting date.
2.Contingent Liabilities:
A contingent liability is a possible obligation arising from past events, whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events.
IAS 37 states that contingent liabilities should not be recognized in the financial statements. However, they should be disclosed unless the possibility of an outflow of resources is remote.
3.Contingent Assets:
A contingent asset is a possible asset that arises from past events, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events.
IAS 37 requires contingent assets to be disclosed when it is probable that the inflow of resources will occur. However, they should not be recognized in the financial statements until the inflow is virtually certain.
4.Measurement of Provisions:
Provisions should be measured based on the expected future cash flows required to settle the obligation, discounted to their present value when the time value of money is material.
The provision should also include costs that are directly attributable to the obligation, such as legal fees.
5.Reimbursement:
If an entity expects to receive reimbursement (e.g., from insurance) for some or all of a provision, the reimbursement should be recognized as a separate asset, but only when it is virtually certain that the reimbursement will be received.
6.Ongoing Review:
Provisions should be reviewed at each reporting date, and adjustments should be made to reflect the current best estimate. If it becomes less likely that the obligation will result in an outflow of resources, the provision should be reversed.
In short, IAS 37 ensures that companies properly recognize, measure, and disclose provisions, contingent liabilities, and contingent assets, helping to provide a more accurate and complete picture of potential financial obligations and risks.