IASB PUBLISHES EXPOSURE DRAFT PROVISIONS – (PROPOSED AMENDMENTS TO IAS 37)


IASB PUBLISHES EXPOSURE DRAFT PROVISIONS – (PROPOSED AMENDMENTS TO IAS 37)

STATUS: Exposure draft

ACCOUNTING IMPACT: The proposed amendments may significantly affect entities that currently apply IFRIC 21 in situations where levies are charged if an entity takes two or more specific actions. The proposed amendments also affect the costs to be included in the measurement of provisions and the discount rate to be used for determining the present value of provisions.

Target: improvements to three aspects of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, one related to recognition and two related to measurement.
  1. Recognition: Amend the recognition criterion related to whether a present obligation exists, which must be met in order to recognise a provision.
  2. Measurement: Amend the requirements related to the costs an entity includes in estimating the
future expenditure required to settle its present obligation. And propose that the discount rate used for determining the present value of provisions does not reflect non-performance risk i.e. the risk that the entity will not settle the obligation.


What do the proposals require?
IAS 37.14 currently provides three criteria that need to be met in order for a provision to be recognised:
  1. an entity has a present obligation (legal or constructive) as a result of a past event;
  2. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
  3. a reliable estimate can be made of the amount of the obligation.
The ED proposes to amend the first criterion i.e. the present obligation recognition criterion. No amendments are proposed to the second and third criteria.