Chapter 13

Current Liabilities and Contingencies

Prepared by: Patricia Zima, CA Mohawk College of Applied Arts and Technology Updated for IFRS by: Ingrid-McLeod Dick Schulich School of Business, York University

Current Liabilities and Contingencies

What is a liability?
What is a current liability? Estimated liabilities

Contingencies, commitments, and

guarantees Presentation, analysis, and international

Definition and Characteristics

Liabilities are:
Obligations of an enterprise Arising from past transactions or events

The settlement of which may result in the

transfer or use of assets, provision of services, or other yielding of economic benefits in the future Defined in Section 1000 of CICA Handbook IFRS states liabilities are present obligations otherwise similar

Definition and Characteristics

Three essential characteristics of a liability are:
1. Obligation requiring the transfer or use of an asset or provision of a service or giving up other economic benefits, to be settled on a determinable date or on the occurrence of an event or on demand 2. There is little or no discretion to avoid the obligation 3. Obligation arises from a transaction or event which has already occurred
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Definition and Characteristics

IFRS has a similar definition for a liability IFRS also includes liabilities arising due to normal business practice or customs (giving rise to an expectation), not just by legal contract.

Financial Liabilities
Contractual obligations to either: 1. deliver cash or other financial asset to another party, or 2. to exchange financial instruments with another party under conditions that are potentially unfavourable Distinction between financial and non-financial is significant as GAAP requires that certain financial liabilities are measured at fair value instead of historic (or amortized) cost IFRS is similar
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Current Liabilities
Current liability described as (not defined in

CICA Handbook): Amounts payable within one year from the date of the balance sheet or within the normal operating cycle where this is longer than a year. Financial Liabilities short-term in nature are normally reported at their maturity value (i.e. the amount of cash payable in the future) IFRS has the same definition
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Current Liabilities
Common current liabilities include:

1. Bank indebtedness and credit facilities 2. Accounts Payable 3. Notes payable 4. Current maturities of longterm debt 5. Short-term debt expected to be refinanced 6. Dividends payable

7. Rents and royalties payable 8. Returnable deposits 9. Unearned revenues 10. Sales taxes payable 11. Goods and Services Tax payable 12. Income taxes payable 13. Employee-related liabilities

IFRS reports and measures these liabilities similar to Canadian GAAP

Bank Indebtedness
Line-of-credit (revolving debt) Generally, an agreement entered with the bank that allows multiple borrowings up to a negotiated limit Repayments made whenever there are sufficient funds available Amount borrowed reported on the balance sheet; availability of funds and restrictions imposed by the financial institution requires note disclosure IFRS is similar
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Accounts Payable
Amounts owed for goods, supplies or services purchased on open account Liability recorded when title has passed Recorded at amount payable

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Notes Payable
Notes payable are written promises to pay a sum of money on a specified future date Arises from purchases, financing or other transactions Notes payable may be classified as either short-term or long-term Notes payable may be interest-bearing or zero-interest-bearing (non-interest-bearing) In both cases, interest expense is determined whenever financial statements are prepared
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Notes Payable
For zero-interest-bearing notes, the difference between the present value of the note and the face value of the note represents the discount on the note payable and the related interest The discount is the interest expense recorded over the life of the note This is the same treatment under IFRS
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Interest-Bearing Notes Payable

Given: Landscape Corp. borrows $100,000 Signs a 4-month, 12% note on March 1
Journal Entries to record Signing of note Interest accrual at June 30 year end and Note repayment

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Interest-Bearing Notes Payable

March 1: Cash 100,000 Notes Payable 100,000 June 30: Interest Expense 4,000 Interest Payable 4,000 (100,000 x 12% x 4/12) July 1: Notes Payable Interest Payable Cash 100,000 4,000 104,000

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Zero-Interest-Bearing Notes Payable

Given:
Landscape Corp. issues a $104,000, 4-month, zero-interest-bearing note on March 1 Present value (PV) of note and cash received is $100,000 Journal entries to record the signing and repayment of the note

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Zero-Interest-Bearing Notes Payable

March 1: Cash Discount on Note Payable Notes Payable

100,000 4,000 104,000

In effect: $100,000 borrowed for four months and $4,000 interest = $104,000 maturity value

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Zero-Interest-Bearing Notes Payable

June 30: Interest Expense Discount on Note Payable July 1: Note Payable Cash

4,000 4,000

104,000 104,000

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Current Maturities of Long-Term Debt

The portion of long-term debt maturing within 12 months from the balance sheet date is reported as a current liability Long-term debts should not be reported as current liabilities if:
1. they are retired by assets not classified as

current assets 2. they are refinanced or retired by new issues of debt 3. they are converted into share capital

Any liability due on demand, or due on demand within a year or operating cycle, is reported as a current liability 18

Short-Term Debt Expected to be Refinanced

Short-term debt may be excluded from current liabilities to the extent that contractual arrangements have been made for settlement from other than current assets. Both of the following criteria must be met to exclude amounts from current liabilities: 1. there is intent to refinance on a long-term basis, and 2. the entity demonstrates the ability to complete the refinancing
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Short-Term Debt Expected to be Refinanced

The entitys ability to refinance is

demonstrated if: a. the debt is actually refinanced before issue of the financial statements, by issuing long term debt or issuing shares after the balance sheet date, or b. the entity enters into a refinancing agreement
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Short-Term Debt Expected to be Refinanced

IFRS has similar requirements, with one difference
IFRS requires that the refinancing agreement be in place prior to the report date for the repayment to be shown as long term, whereas Canadian GAAP requires the agreement in place prior to the issue date

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Short-Term Debt Replaced by Long-Term Debt (Illustration 13-2)

Liability $40,000 How to classify? Liability of $40,000 paid off

Issues long-term debt of $100,000

Liability of $40,000 classify as current

Dec. 31, 2008 Balance sheet date

Jan. 17, 2009

Feb. 3, 2009

Mar. 1, 2009 Balance sheet issued

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Dividends Payable
Cash Dividend Becomes legal obligation on declaration date Classified as current liability Preferred Dividends in Arrears Cumulative preferred dividends that have not been declared require note disclosure Not recognized as a liability Stock Dividends Not a liability; does not meet the definition of a liability as no future outlays of assets/services Recorded only through equity accounts i.e. represents a transfer of equity from retained earnings to contributed capital 23

Rents and Royalties Payable

This type of liability may be created by a contractual agreement in which payments are conditional on the amount of revenue that is earned or the quantity of product that is produced or extracted. Examples include the following: Franchisees often pay the franchisor franchise fees calculated as a % of sales Tenants in shopping centers may be required to pay additional rents based on sales
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Returnable Deposits
Customers may pay deposits that guarantee the payment of expected future obligations or the performance of a future service They are classified as either current or noncurrent liabilities depending on the time between the date of the deposit and the end of the relationship

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Unearned Revenues
When cash is received before the product is delivered or service is rendered Examples include gift certificates, prepayment for subscription A current liability is created by the transaction When cash is received: Dr. Cash Cr. Unearned Revenue When revenue is earned (service or good is provided) Dr. Unearned Revenue Cr. Revenue

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Goods and Services Tax (GST)

Most businesses in Canada pay GST As of July 1, 2006 GST is calculated at a rate of 6% GST Payable Represents amount collected on eligible sales GST Recoverable GST paid on eligible purchases Net amount of GST Payable and GST Recoverable remitted to (due from) CRA (Canada Revenue Agency) 27

Employee-Related Liabilities
Employee-related liabilities include the following: salaries or wages owed to employees at end of the accounting period payroll deductions owed to CRA and others compensated absences obligations bonuses Reported as current liabilities
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Profit sharing and bonus plans IFRS

IAS 19 recognizes a liability under profitsharing and bonus plans when a legal or constructive obligation exists as indicated by:
a documented plan showing the formula for calculations, and the amount is determined prior to the date of authorization to issue the statements, and past practices indicate a constructive obligation (arising due to normal business practices).
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Payroll Deductions
Payroll deductions include statutory and discretionary deductions Statutory (mandatory) deductions include: Canada (Quebec) Pension Plan [CPP/QPP] Employment Insurance (EI) Income Tax Withholding (Federal and Provincial) Discretionary deductions might include: Insurance premiums Union dues Until these deductions are remitted to the government, they are reported as current liabilities

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Compensated Absences

Compensated absences are absences from employment for which employees are paid A liability for such absences must be accrued if: employers liability relates to services already rendered by employees the liability relates to employees vested or accumulated rights payment of the compensation is probable, and the amount can be reasonably estimated. The liability is recognized in the year the benefit is earned by employees The current rate is often used
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Compensated Absences -IFRS

IAS 19 under IFRS provides detailed guidance on these short term employee benefits Similar treatment to Canadian GAAP for these short term benefits Current or expected future rates may be used IFRS recognizes termination payments when there is a detailed plan that includes:
Location, function and approximate number of employees impacted; Termination benefits for each job function; Implementation date.

Canadian GAAP records termination payments at time of communication

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Restructuring Provisions - IFRS

IAS 37 has extensive guidance detailing that the restructuring plan should be recognized as a provision when there is:
A formal detailed plan Valid expectation that the plan will be carried out by either implementing or announcing the plan

Costs include only direct costs that:

Are necessary to the plan and Are not associated with ongoing activities of the entity

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Estimated Liabilities
Examples of estimated liabilities include: Product guarantee and warranty obligations Obligations to provide premiums and price reductions in the future Recognized in the current period as it is likely that an obligation will result Obligations all relate to transactions of the current period
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Provisions under IFRS

Provision is an obligation arising as a result of past events, which is probable (more likely than not) and can be reliably estimated, but the timing and amount is uncertain Legal or constructive provision Constructive provision arises due to past actions resulting in an expectation
Example the Entity has made refunds to customers in the past, giving an expectation that this will continue in the future, even though there is no legal obligation to do so

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Provisions under IFRS

Where the time value of money is material, the future cash flows are discounted to determine the amount of the provision Measure provisions at the best estimate, which is the expected outcome
Large number of items use the expected outcome method Large number of items in a continuous range use the midpoint Single event use most likely outcome
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Provisions under IFRS

Example: Company sells machines with a one-year warranty, under which the company will either fix or replace the machine. During the year 1,000 units were sold; over the past 5 years, 3% of the machines have been defective, and of that 3%, have required full replacement at $5,000 each, and the other half were fixed at $500 each. Determine the warranty provision at the year end. Answer: (1,000 X 3% X 50% X $5,000) + (1,000 X 3% X 50% X $500 ) = $82,500
From: IFRS Primer International GAAP Basics, Wiecek and Young, 2009, page 50
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Product Guarantee and Warranty Obligations

Warranty - promise made by a seller to correct problems experienced with a products quantity, quality, or performance Warranties entail future post-sale costs Warranty accounting dependent on how the warranty is sold; two different possibilities: 1. Warranty provided as part of the product price 2. Warranty sold as a separate item
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Warranty Embedded in Sales Price of Product

Considered an estimated cost/liability A liability is recorded if: 1. It is likely that future costs incurred as a result of the current sales and 2. The amount can be reasonably estimated Accounted for using the expense warranty method Warranty costs estimated in advance Warranty costs expensed in year of sale Warranty liability recognized Two available methods for accounting as follows IFRS has similar treatment as a provision

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Warranty Embedded in Sales Price of Product

Method A
Warranty costs charged to the expense as incurred Adjusting entry required at period end to accrue remaining estimated liability and expense on current period sales Warranty liability reported for the estimated amount of outstanding claims

Method B
Total estimated warranty

expense and liability recognized and recorded at the point of the sale Warranty costs charged against liability as incurred Warranty liability reported for the estimated amount of outstanding claims

Treatment would be similar under IFRS

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Expense Warranty Method: Example

Given: Units sold in 2008: 100 units at $5,000 Expected average repair cost (under 1-year warranty) per unit: $200 Actual repair costs incurred in 2008: $4,000 The entity has the calendar year as its fiscal year Record the warranty expense for 2008
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Expense Warranty Method: Example (Method A)

Warranty Expense Recognition (Time of Sale): No entry made
Actual Warranty Costs in 2008: Warranty Expense 4,000 Cash/Inventory/Payroll

4,000

Year-end adjusting entry, Dec. 31, 2008: Warranty Expense 16,000 Estimated Warranty Liability 16,000
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Expense Warranty Method: Example (Method B)

Warranty Expense Recognition (Time of Sale): Warranty Expense 20,000 Estimated Warranty Liability 20,000 100 units @ $200

Actual Warranty Costs in 2008: Estimated Warranty Liability 4,000 Cash/Inventory/Payroll Year-end adjusting entry, Dec 31, 2008: No entry required

4,000

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Product Guarantee and Warranty Obligations-Use of Cash Basis

Warranty costs charged to the period in which the costs are paid No estimated liability recorded or reported Acceptable for accounting purposes when: Warranty costs are immaterial, or Warranty period is relatively short Required for income tax purposes
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Warranty Sold Separately

Applies to extended product warranties; or warranties sold as separate product Accounted for using sales warranty method Revenue from warranty sale deferred Recognized over life of the warranty using straight-line method

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Sales Warranty Method: Example

You have just purchased a new vehicle and an extended warranty on your new vehicle Cost of the vehicle: $20,000 Vehicle has a regular warranty (included in price of car) for the first 25,000 km or two years Cost of the extended warranty: $600 Extended Warranty period: 2 years or 25,000 kilometers Entries to record this warranty:
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Sales Warranty Method: Example

Record the initial sale: Cash 20,600 Sales Unearned Warranty Revenue

20,000 600

Entries in Years 3 and 4: Unearned Warranty Revenue Warranty Revenue ($600 2 years)

300 300

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Premiums, Coupons, Rebates, and Loyalty Points

Many companies offer premiums and other benefits (such as frequent flyer miles, rebates and prizes) to customers Costs of these offers are expensed in the period that benefits from the premium or other benefit: the period of the underlying sale Costs of outstanding offers are estimated and recorded/reported as a current liability Canadian recommend that a better approach would be to allocate and defer a portion of the revenue that relates to the entitys obligation of supplying the customer premium/benefit in the 48 future this is also what IFRS recommends

Asset Retirement Obligations (ARO)

CICA Handbook, Section 3110 requires a company to recognize an existing legal obligation associated with the retirement of a tangible long-lived asset that results from its acquisition, construction, development, or normal operations, in the period it is incurred, provided a reasonable estimate can be made of its fair value

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Asset Retirement Obligations (ARO)

Existing legal obligations include those related to:
1. Decommissioning nuclear facilities 2. Dismantling, restoring, and reclamation of oil and gas properties, 3. Certain closure, reclamation, and removal costs of mining facilities, and 4. Closure and post-closure costs of landfills
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ARO Measurement and Recognition

Initial measurement at fair value Amount paid in an active market to settle ARO Estimate based on market prices of similar liabilities Estimate based on PV calculations Recognition and allocation Capitalized ARO costs are not recorded in separate account Added to the carrying amount of the underlying asset ARO costs amortized over underlying assets 51 useful life

ARO An Example
Oil Platform erected January 1, 2008
Platform must be dismantled at the end of the useful life: 5 years

Estimated cost of dismantling: $1,000,000

Discount rate: 10% PV of the dismantling cost (ARO): $620,920
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ARO An Example
Journal entry to recognize ARO, Jan 1, 2008: Drilling Platform 620,920 Asset Retirement Obligation 620,920
(Drilling Platform is the underlying asset account)

Year-end Adjustment journal entries (2008 2012): Amortization Expense 124,184 Accumulated Amortization 124,184
($620,920 5 years = $124,184)
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ARO Increase Due to interest

Interest on the ARO must also be recorded Because the ARO is initially recorded and reported at PV Interest cost may not be classified as interest expense Generally called accretion expense Accretion amount calculated using the same rate used to calculate the PV (the discount rate)
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ARO An Example
Year-end (December 31, 2008): Accretion Expense 62,092 Asset Retirement Obligation
($620,920 x 10% = $62,092)

62,092

Record ARO Settlement, January 2013: Asset Retirement Obligation 1,000,000 Gain on Settlement of ARO 5,000 Cash 995,000
Assuming that the actual cost of the dismantling and removal was $995,000
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ARO Reporting and Disclosure

Must report description of the ARO and the underlying asset Disclose the following: Assumptions used in determining reported amounts Reconciliation of the liability (opening and closing balance) Fair value of legally restricted assets for settling ARO
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ARO Measurement and Recognition under IFRS

IAS 37 has the same measuring and reporting treatment of AROs with three major differences:
Discount rate used to present value is a pre-tax rate reflecting the risk specific to the liability and this may change annually (under Canadian GAAP this may remain the same for downward adjustments) Interest on the ARO is recorded as part of interest expense May arise due to constructive and legal obligations
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Contingency: Definition
A contingency is (CICA Handbook, Section 3290): An existing condition or situation involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur

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Loss Contingencies: General

Loss contingencies involve situations of

possible loss at the balance sheet date A liability incurred as a result of a loss contingency is a contingent liability The likelihood of occurrence of the future event may be: Likely (high chance) Unlikely (slight chance) Not determinable (the chance of the event occurrence cannot be determined)
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Loss Contingencies: Accrual

Estimated losses from loss contingencies are accrued as liabilities if both of the following conditions are met: 1. it is likely that a future event will confirm that a liability has been incurred, at the balance sheet date and 2. the amount of loss can be reasonably estimated It is not necessary that the exact payee or the exact date of payment be known
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Accounting and Reporting Standards for Loss Contingencies

Probability
Likely Not Likely Not Determinable

Loss can be reasonably estimated? Yes No

Accrue No Disclosure Notes* Notes No Disclosure Notes*

* Disclose the nature of the contingency and either an estimate of the amount or an explanation that an estimate cannot be made
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Litigation, Claims, and Assessments

To determine whether a liability should be recorded, evaluate: 1. the time period in which the underlying cause of action occurred 2. the probability of an unfavorable outcome* 3. the ability to make a reasonable estimate of loss

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Litigation, Claims, and Assessments

*To evaluate the likelihood of an unfavourable

outcome, consider:

nature of litigation and progress of case opinion of legal counsel experience in similar cases company response to the lawsuit

For unfiled lawsuits: the company must first determine the likelihood that the lawsuit will be filed If likely, it must be determined how probable it is that the outcome will be unfavourable
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Contingencies under IFRS

Terminology under IFRS means something different Contingent liability under IFRS is:
(a) a possible obligation that arises from past events whose existence will be confirmed by a future event; or (b) an obligation that has arisen from a past event, but the outflow is not probable and/or is not measurable is not recognized due to significant uncertainty disclose unless remote
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IFRS comparison of provisions and contingent liabilities

Provision Obligation arising from past event Outflow is Measurability Present obligation Probable Able to measure Contingent liability Possible obligation Is not probable Unable to measure

A pending lawsuit is reported as a provision if it arises from a past event, is probable and can be measured.

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Guarantees
New AcG-14 Disclosure of Guarantees Supplements contingencies, contractual obligations, financial instruments Disclose additional information about risks assumed by guarantees made Examples: Standby letter of credit guaranteeing anothers payment of a loan, lessees guarantee of the residual value of leased property under an operating lease
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Financial Guarantees under IFRS

Under IFRS there are four possible methods to account for financial guarantees by the issuers:
IAS 39 special accounting where there is continuing involvement measure at amount that reflects obligations retained IAS 39 reflect at FVTPL with gain or loss into net income IAS 39 at fair value at initial recognition, and then subsequently measured at the greater of the provision amount under IAS 37, or dollar amount determined under revenue less amortization IFRS 4 if considered an insurance contract and previous similar contracts were treated as insurance contracts
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Non-Financial Guarantees under IFRS

IFRS provides guidance on recognizing and measuring non-financial guarantees and disclosure and there are two possible methods for recognition and measurement:
IFRS 4 as an insurance contract IAS 37 estimating a provision

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Contractual Obligations
Not liability as at balance sheet date, but do represent a commitment or contractual obligation of future funds CICA Handbook, Section 3280 highlights contractual obligations that require disclosure: 1. Unusual high speculative risk involved 2. Expenditures high relative to size of business 3. Involve share issue 4. The level of expenditure dictated for a long period of time

Similar disclosure required under IFRS

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Onerous Contracts under IFRS

Definition:
a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits to be received. Recognize as a provision

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Onerous Contracts under IFRS

Example: Heinrich Limited purchases raw materials that are used to manufacture its products under non-cancellable purchase contracts that require a fixed amount of products to be purchased over a fixed term with a fixed price. Currently, the company is locked into buying 1,000 kilograms of raw material at a cost that exceeds the market price. This is an onerous contract since the costs to settle the contract exceed the benefits. The expected loss and obligation would be accrued as a provision at the report date.

From: IFRS Primer International GAAP Basics, Wiecek and Young, 2009, page 53

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Self-insured Risks
Some companies do not carry insurance and absorb potential losses themselves No liability or loss is recognized until actual damage occurs However, where an injury or other existing condition exists with uncertainty as to amount and timing of loss in the future considered a contingency IFRS treatment is similar
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Presentation of Current Liabilities

Disclose separately: bank loans, trade creditors and accrued liabilities, taxes, dividends, deferred revenue, future income taxes, amounts owing to related parties Identify secured liabilities and related assets pledged In addition, IFRS requires that provisions be separately disclosed along with a reconciliation of the opening and ending balances for each class of provision

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Analysis of Current Liabilities

Current Ratio: Current Assets Current Liabilities Acid-Test Ratio: Cash + Marketable Securities + Net Receivables Current Liabilities Days Payables Outstanding: Average Trade Accounts Payable Average Daily Cost of Goods Sold

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Current IFRS GAAP Comparisons Employee benefits

IAS 19 provides more detailed guidance on employee short term benefits, bonuses and termination payments. The standard provides criteria that must be met in order to record bonuses or termination payments as liabilities or provisions.
HB 3461 does not deal with these issues and recognizes expense if payment is probable and can be reliably measured

IAS 19 - Termination benefits should be recognized only when specific criteria are met to indicate that the entity is committed to terminating the employees.
HB 3461 distinguishes between termination payments required under a contract, and those arising due to involuntary terminations, which will be recognized when management approves and commits to the plan and employees have accepted the voluntary severance offer

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Current IFRS GAAP Comparisons

A provision is a liability of uncertain timing and amount
HB does not define a provision

IFRS requires constructive as well as legal obligations to be recognized

HB only requires obligations arising due to legal, moral, or ethical principles to be recognized

A provision is to be measured at the best estimate required to settle the obligation and guidance is given as to how to make this calculation
HB does not address measurement of provisions

The present value of the provision should be recognized and any increase over time is recorded as an interest expense
HB 1000 does not provide guidance on present valuing liabilities only in specific circumstances such as pension liabilities or AROs.

Onerous contracts must also be recognized as provisions using the best estimate of unavoidable costs that exceed the expected benefits
HB does not address onerous contracts
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Current IFRS GAAP Comparisons

IAS 37 recognizes a constructive provision for restructuring costs when specific criteria are met including a detailed formal plan and a valid expectation that the plan will be carried out
EIC 135 states that only a present obligation needs to be recorded and an exit plan, by itself, is not an indication of this but would also require communication

A contingent liability is not recognized under IFRS because the future outflow is not probable and/or the amount is not measurable.
HB 3290 defines a contingent liability differently where there is uncertainty as to how the obligation will be resolved in the future. If the loss is likely and can be determined, then it is recognized.

Extensive disclosure is required for each type of provision including a reconciliation of the opening and closing balances and an indication of the measurement uncertainties.
HB has no specific disclosure requirements for general liabilities HB 1508 requires disclosure on measurement uncertainty Disclosure for contingent losses are less extensive than under IFRS
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Current IFRS GAAP Comparisons

IAS 37 requires constructive (as well as legal) obligations arising due to AROs to be measured at the best estimate and discounted at the pretax rate that effects the risk of the specific liability. The provision should be reviewed annually, and the discount rate may be changed to reflect the current market risk rate.
HB 3110 applies to legal obligations and downward adjustments will be made using the original credit-adjusted risk free rate.

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GAAP versus IFRS Comparison

GAAP HB 1000 defines liabilities very generally and provides little guidance on measurement and recognition HB 1510 definition of current liability is less comprehensive than IAS 1 EIC 22 and EIC 59 allows long term debt payable in next 12 months due to contract maturity or breach of covenants to be excluded from current liabilities as long as refinancing arrangement in place prior to issue date of financial statements and managements intent is to refinance HB 1000 does not define a provision nor is guidance given on measuring the provision HB 3290 defines contingent liabilities to be uncertain liabilities that can be recognized if outflows are probable and the amount can be reasonably measured. Onerous contracts are not addressed in HB IFRS Framework has a similar definition of liability but states that this is a present obligation IAS 1 has a similar definition of current liability IAS 1 requires long term debt due ( because of maturity or covenant breach) in the next 12 months to be recognized as current unless refinancing arrangement in place at balance sheet date IAS 37 provides specific guidance on provisions and contingent liabilities Both legal and constructive provisions are to be recognized Provisions are measured at their best estimate and guidance is given as to how to determine this best estimate based on the number of events that will occur Contingent liabilities are not recognized under IFRS because of the high level of uncertainty about the probability of out flows and/or measurability. IAS 37 requires onerous contracts be recognized as the amount of excess costs over the benefits to be realized on existing contracts

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GAAP versus IFRS Comparison

HB 3461 does not deal with short term employee benefits provided to employees while in active service HB 3461 distinguishes between contractual and special termination benefits and EIC 134 provides detailed guidance on when these should be recognized. EIC 134 allows for recognition of voluntary termination only when the employee has accepted the terms of the offer. Asset retirement obligations, HB 3110, are limited to legal obligations, are measured initially at fair value in the period the obligation is incurred and generally uses the discount rate applied when the liability was originally recognized HB is silent on loyalty points programs, but it is interpreted as a multiple deliverable, and under EIC 1412, should be recognized as deferral of a portion of the revenue at the time of the initial sale. AcG 14 details disclosure requirements for financial guarantees, but not for measurement and recognition IAS 19 provides guidance on short term employee benefits while the employee is still providing active service Profit sharing and bonus plans are covered in IAS 19 requiring recognition when there is a legal or constructive obligation and a reliable estimate can be determined Termination payments under IAS 19 are recognized when the entity is demonstrably committed to the termination based on satisfying three criteria including a detailed plan outlining employees affected, termination benefits, and timing of implementation. Restructuring plans under IAS 37 are recognized when there is a formal detailed plan and there is a valid expectation that the plan will be carried out. Disclosure requirements with respect to the plan are also covered. Asset retirement obligations are covered by IAS 37; apply to constructive and legal obligations, are measured at the best estimate of amount to settle the obligation at the balance sheet date, and uses current interest rates IFRIC 13 outlines the recognition and measurement of customer loyalty points and requires that a portion of revenue received on the initial sale should be deferred until the loyalty points are redeemed by the customer. The liability is measured at the value of award credits to the customer. IAS 39 and IFRS4 cover the recognition and measurement of financial and non-financial guarantees

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Looking Ahead to IFRS

ED issued on Provisions and Contingent Liabilities and Contingent Assets addressing the following main issues:
Recognize obligations that meet the definition of a liability (as determined under the revised definition in the Framework) Restructuring obligations (IAS 37 and IAS19) to be revised and to be aligned with US (FAS 146) Eliminate the term provision, but redefine a liability and contingency Refine definitions of constructive obligations and onerous contracts

Final revised standard expected in second half of 2009.

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