HKAS 37 - Provisions, Contingent Liabilities (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Objective & Scope | Scope exclusions | HKAS 37 applies to provisions, contingent liabilities, and contingent assets, excluding financial instruments (HKFRS 9), executory contracts (unless onerous), insurance contracts (IFRS 17), and items covered by other Standards. |
| Definitions | Provision vs. Contingent Liability | A provision is a liability of uncertain timing or amount; a contingent liability is a possible obligation or a present obligation that fails recognition criteria (not probable outflow or not reliably measurable). |
| Recognition | Three criteria for a provision | Recognise a provision when: (a) present obligation from past event, (b) probable outflow of resources, (c) reliable estimate can be made. |
| Measurement | Best estimate | Best estimate = amount entity would rationally pay to settle or transfer the obligation. Use expected value for large populations, most likely outcome adjusted for single obligations. |
| Reimbursements | Separate asset recognition | Recognise reimbursement as a separate asset only when virtually certain, and not exceeding the provision amount. |
| Changes & Use | Review and reversal | Review provisions each reporting period; reverse if outflow no longer probable. Use only for original purpose. |
| Application Rules | Onerous contracts & restructuring | Recognise provision for onerous contracts (unavoidable costs exceed benefits). Restructuring provision requires detailed formal plan and valid expectation in affected parties. |
| Disclosure | Movement schedule & narrative | Disclose movement schedule (opening, additions, used, reversed, discount unwind) and narrative (nature, timing, uncertainties, reimbursements). |
Objective and Scope
Objective
Ensure appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets, with sufficient disclosure for users to understand their nature, timing, and amount.
Scope Exclusions
| Excluded Items | Reason |
|---|---|
| Financial instruments within HKFRS 9 | Covered by another Standard |
| Executory contracts (unless onerous) | Not within scope |
| Insurance contracts within IFRS 17 | Covered by another Standard |
| Items covered by other Standards | Specific Standards apply |
Key Definitions
Provision
A liability of uncertain timing or amount.
Liability
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Obligating Event
An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.
Legal vs. Constructive Obligation
| Type | Source |
|---|---|
| Legal Obligation | Contract (explicit or implicit terms), legislation, or other operation of law. |
| Constructive Obligation | Entity's actions (past practice, published policies, current statement) that create a valid expectation in other parties that it will discharge responsibilities. |
Contingent Liability
(a) A possible obligation from past events confirmed by uncertain future events not wholly within the entity's control; or (b) a present obligation not recognised because outflow is not probable or amount cannot be measured reliably.
Contingent Asset
A possible asset from past events confirmed by uncertain future events not wholly within the entity's control.
Onerous Contract
A contract where unavoidable costs of meeting obligations exceed expected economic benefits.
Restructuring
A programme planned and controlled by management that materially changes the scope or manner of a business.
Recognition of Provisions
Three Recognition Criteria (Paragraph 14)
A provision shall be recognised when:
- (a) Present obligation (legal or constructive) as a result of a past event;
- (b) Probable outflow of resources embodying economic benefits; and
- (c) Reliable estimate can be made.
Present Obligation (Paragraphs 15-16)
If uncertain, a past event gives rise to a present obligation if it is more likely than not that a present obligation exists at the end of the reporting period.
Past Event - Obligating Event (Paragraphs 17-22)
The entity must have no realistic alternative to settling the obligation (enforceable by law or constructive obligation). A management decision alone does NOT create a constructive obligation unless communicated to affected parties before the end of the reporting period.
Probable Outflow (Paragraphs 23-24)
Probable = more likely than not (>50%). For similar obligations (e.g., warranties), consider the class as a whole.
Reliable Estimate (Paragraphs 25-26)
Except in extremely rare cases, an entity can make a reliable estimate. If not, disclose as a contingent liability.
Contingent Liabilities (Paragraphs 27-30)
Do NOT recognise. Disclose unless outflow is remote. Assess continually; if outflow becomes probable, recognise provision.
Contingent Assets (Paragraphs 31-35)
Do NOT recognise. Disclose if inflow is probable. Recognise only when inflow is virtually certain.
Measurement of Provisions
Best Estimate (Paragraphs 36-41)
The amount recognised shall be the best estimate of expenditure required to settle the present obligation at the end of the reporting period.
| Situation | Method |
|---|---|
| Large population of items | Expected value (weighted average of all possible outcomes) |
| Single obligation | Individual most likely outcome, adjusted for other possible outcomes |
| Continuous range of equally likely outcomes | Mid-point of the range |
Risks and Uncertainties (Paragraphs 42-44)
Take into account risks and uncertainties. Do not overstate liabilities or create excessive provisions. Avoid duplicating adjustments.
Present Value (Paragraphs 45-47)
If time value of money is material, use present value. Discount rate: pre-tax, reflecting current market assessments and risks specific to the liability not already adjusted in cash flows.
Future Events (Paragraphs 48-50)
Reflect future events if sufficient objective evidence they will occur (e.g., expected cost reductions from existing technology). Do not anticipate completely new technology unless supported.
Expected Disposal of Assets (Paragraphs 51-52)
Gains from expected disposal of assets shall NOT be taken into account in measuring a provision.
Reimbursements, Changes, and Use of Provisions
Reimbursements (Paragraphs 53-58)
Recognise reimbursement as a separate asset only when virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised shall not exceed the provision. In the statement of comprehensive income, the expense may be presented net of the reimbursement.
Changes in Provisions (Paragraphs 59-60)
Review at each reporting period and adjust to current best estimate. Reverse if outflow is no longer probable. When discounting, the increase due to passage of time is recognised as borrowing cost (interest expense).
Use of Provisions (Paragraphs 61-62)
A provision shall be used only for expenditures for which it was originally recognised. Setting expenditures against a provision for another purpose conceals the impact of two different events.
Application of Recognition and Measurement Rules
Future Operating Losses (Paragraphs 63-65)
Onerous Contracts (Paragraphs 66-69)
Recognise a provision for an onerous contract. Unavoidable costs = lower of (a) cost of fulfilling, and (b) compensation or penalties from failure to fulfil. Cost of fulfilling includes incremental costs and an allocation of directly related costs (e.g., depreciation of PPE used). Before recognising the provision, recognise any impairment loss on assets used in fulfilling the contract.
Restructuring (Paragraphs 70-83)
A constructive obligation arises only when: (a) a detailed formal plan exists (identifying business, locations, employees, expenditures, and timing), and (b) the entity has raised a valid expectation in those affected by starting implementation or announcing the plan before the end of the reporting period. A management decision alone does NOT create an obligation. For sale of an operation, obligation arises only when there is a binding sale agreement.
What a restructuring provision includes: Direct expenditures necessarily entailed by the restructuring and not associated with ongoing activities.
What it excludes: Retraining/relocating continuing staff, marketing, investment in new systems, future operating losses (unless from onerous contract), gains on expected disposal of assets.
Disclosure Requirements
Provisions - Movement Schedule (Paragraph 84)
For each class of provision, disclose:
- (a) Carrying amount at beginning and end of the period
- (b) Additional provisions made (including increases to existing provisions)
- (c) Amounts used (incurred and charged against the provision)
- (d) Unused amounts reversed
- (e) Increase in discounted amount from passage of time and effect of any change in discount rate
Provisions - Narrative Disclosures (Paragraph 85)
For each class: (a) brief description of nature and expected timing, (b) indication of uncertainties (including major assumptions), (c) amount of expected reimbursement and asset recognised.
Contingent Liabilities (Paragraph 86)
Unless remote, disclose: (a) brief description, (b) estimate of financial effect (if practicable), (c) indication of uncertainties, (d) possibility of reimbursement.
Contingent Assets (Paragraphs 89-90)
If inflow is probable, disclose: (a) brief description, (b) estimate of financial effect (if practicable). Avoid misleading indications of likelihood of income.
Disclosure Exemption (Paragraph 92)
In extremely rare cases where disclosure would seriously prejudice the entity's position in a dispute, the entity need not disclose the information but shall disclose the general nature of the dispute and the reason for non-disclosure.
Decision Tree and Key Takeaways
Recognition Decision Tree and Key Takeaways
Recognition Decision Tree (Implementation Guidance B)
- Present obligation from past event? No โ Possible obligation? No โ No provision/contingent liability. Yes โ Go to 2.
- Outflow probable? No โ Possible obligation? Yes โ Disclose contingent liability. Yes โ Go to 3.
- Reliable estimate? No โ Disclose contingent liability. Yes โ Recognise provision.
Key Takeaways Summary Table
| Concept | Key Rule |
|---|---|
| Provision Recognition | Present obligation + probable outflow + reliable estimate |
| Probable Definition | More likely than not (>50%) |
| Contingent Liability | NOT recognised; disclose unless remote |
| Contingent Asset | NOT recognised; disclose if probable; recognise if virtually certain |
| Best Estimate | Expected value for large populations; most likely outcome adjusted for single obligations |
| Discounting | Required when time value of money is material; use pre-tax rate |
| Future Events | Include if sufficient objective evidence they will occur |
| Asset Disposal Gains | NOT included in provision measurement |
| Reimbursement | Recognise as separate asset only if virtually certain; cannot exceed provision |
| Provision Use | Only for original purpose |
| Future Operating Losses | NO provision |
| Onerous Contracts | Recognise provision; unavoidable costs = lower of fulfilment cost or exit cost |
| Restructuring | Detailed formal plan + valid expectation in affected parties |
| Restructuring Costs | Only direct expenditures not associated with ongoing activities |
| Disclosure Exemption | Only in extremely rare cases where disclosure would prejudice position |
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