ACCA Strategic Professional · Strategic Business Reporting (International)

Provisions, Contingencies and Events After the Reporting Period

IAS 37 tells you when to recognise a liability of uncertain timing or amount, and how to measure it. Recognise a provision if there is a present obligation from a past event, an outflow is probable and you can estimate it reliably. IAS 10 decides whether later events adjust the financial statements or only need disclosure.

What this chapter covers

This chapter covers two standards that deal with uncertainty at the reporting date. IAS 37 Provisions, Contingent Liabilities and Contingent Assets decides whether an uncertain obligation goes on the statement of financial position, is only disclosed, or is ignored. IAS 10 Events after the Reporting Period decides how to treat events that happen between the reporting date and the date the financial statements are authorised for issue.

The core idea is the same throughout. You test the facts at the reporting date. Is there a present obligation? Is an outflow probable? Can you measure it reliably? Once you can apply those three tests, restructuring, onerous contracts, decommissioning and legal claims become variations on one method.

The chapter links to much of the rest of SBR. Decommissioning costs feed into the cost of property, plant and equipment under IAS 16 and into discounting. Restructuring links to business combinations, discontinued operations and impairment. Provisions for claims and post-reporting-date events often appear in the 20-mark reporting and ethics question, where management may be tempted to avoid or delay a liability. They also appear in group accounting adjustments.

SBR is a written, scenario-based exam, and provisions are a favourite way to test judgement. A short scenario can ask whether a liability exists, how much to book and what to disclose, and it often adds an ethical angle such as management wanting to understate a provision to protect profit. You earn marks by stating the rule, applying it to the facts given and reaching a clear conclusion with figures. The topics are also compact. A few hours of focused practice make you reliable on a question that can appear in Section A or Section B, and the same thinking supports your professional skills marks for analysis and scepticism.

Provisions, contingencies and events after the reporting period: topics in the order to study them

1IAS 37 Provisions Recognition and MeasurementIt sets the three recognition tests, the best estimate and discounting, which every later topic relies on.
2Contingent Liabilities and Contingent AssetsIt covers what fails the recognition tests, so you learn the boundary between provide, disclose and ignore right after the core rules.
3Onerous Contracts, Restructuring and DecommissioningThese are the applications of IAS 37 that scenarios test most, and they need the earlier rules and some IAS 16 and discounting links.
4IAS 10 Events After the Reporting PeriodIt is a separate standard with its own adjusting or non-adjusting test, easiest to learn once you know how IAS 37 treats conditions at the reporting date.

How to prepare Provisions, contingencies and events after the reporting period

Aim to apply a short decision process to any scenario, rather than memorising lists. Build it in stages and then practise it in exam-style written answers.

Learn the IAS 37 definition of a provision and the three recognition tests. Write them out from memory until you can do it without notes.
Practise the decision flow: present obligation, probable outflow, reliable estimate. Then choose between provide, disclose or ignore. Run it on five or six short scenarios.
Learn measurement: best estimate, expected value for large populations, most likely outcome for a single obligation, and discounting when the time value of money is material. Do one numerical example of each.
Work through restructuring, onerous contracts and decommissioning. For each, note the trigger event, such as a detailed formal plan with a valid expectation in others, and what costs are included or excluded.
Learn the IAS 10 test: adjusting events give evidence of conditions at the reporting date, non-adjusting events relate to conditions arising afterwards. Practise sorting examples and stating the effect on the numbers.
Answer two or three past-style written questions under time. Structure each answer as rule, application to the facts, conclusion with a figure, and include any ethical or professional point.
Review your answers against the marking approach. Check you used the scenario facts rather than generic statements.

Common mistakes in Provisions, contingencies and events after the reporting period

Booking a provision because a cost is expected, without checking for a present obligation at the reporting date.
Fix: Always ask first what past event created an obligation. If there is none, there is no provision, however likely the cost.
Confusing a restructuring provision with a board decision.
Fix: Check for a detailed formal plan and a valid expectation in those affected, such as an announcement or started implementation, before the reporting date. Exclude retraining and relocation of continuing staff.
Treating contingent assets like contingent liabilities, or provisioning for a probable gain.
Fix: Remember the asymmetry. Recognise a contingent asset only when the inflow is virtually certain, disclose it when probable, and otherwise say nothing.
Forgetting the double entry for decommissioning and the unwinding of discount.
Fix: Debit the asset cost and credit the provision at present value. Then charge depreciation and add the unwinding as a finance cost each year.
Misclassifying events after the reporting period by the date they happen rather than what they evidence.
Fix: Ask whether the event gives evidence of a condition that existed at the reporting date. A customer insolvency that confirms a receivable was already doubtful is adjusting. A fire after the year end is not.
Giving a numbers-only answer with no explanation or conclusion.
Fix: State the rule, apply it to the facts, give the accounting treatment and quantify it. Add a comment on disclosure or management bias where the scenario hints at it.

Last-day revision: Provisions, contingencies and events after the reporting period

A provision needs a present obligation from a past event, a probable outflow and a reliable estimate.
Probable in IAS 37 means more likely than not.
Obligation can be legal or constructive. A constructive obligation arises from a valid expectation created in others.
No provision for future operating losses.
Measure at the best estimate. Use expected value for a large population and the most likely outcome for a single obligation.
Discount if the effect is material, using a pre-tax rate that reflects the risks specific to the liability, and unwind the discount as a finance cost.
A contingent liability is disclosed unless the chance of outflow is remote. A contingent asset is disclosed only when an inflow is probable and is recognised only when it is virtually certain.
An onerous contract provision is the lower of the cost of fulfilling the contract and the cost of exiting it, after impairment of assets dedicated to it.
A restructuring provision needs a detailed formal plan and a valid expectation in those affected that it will be carried out. Include only direct expenditure from the restructuring.
Decommissioning: recognise a provision at present value and add the same amount to the asset cost when the obligation arises.
Adjusting events give further evidence of conditions at the reporting date. Non-adjusting events are disclosed if material.
Dividends declared after the reporting date are not a liability at that date. If the going concern basis is no longer appropriate after the reporting date, that is an adjusting matter affecting the whole basis of preparation.

Provisions, contingencies and events after the reporting period practice questions

Provisions, contingencies and events after the reporting period in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Provisions, contingencies and events after the reporting period: frequently asked questions

What are the three conditions for recognising a provision under IAS 37?

There must be a present obligation, legal or constructive, from a past event. An outflow of economic benefits must be probable. You must be able to make a reliable estimate of the amount. If any one fails, you do not recognise a provision, though you may need to disclose a contingent liability.

What is the difference between an adjusting and a non-adjusting event under IAS 10?

An adjusting event provides evidence of conditions that existed at the reporting date, so you change the recognised amounts. A non-adjusting event relates to conditions that arose after the reporting date, so you do not change the figures but disclose it if it is material. The test is what the event evidences, not just when it happens.

Do I need to discount provisions in SBR?

Yes, where the effect of the time value of money is material. Use a pre-tax rate that reflects current market assessments and risks specific to the liability. Then unwind the discount each period as a finance cost. Decommissioning provisions are the usual place this is tested.

How is this chapter tested in the SBR exam?

It often appears as part of a longer scenario with several issues, or as a standalone discussion and calculation question. You are asked to explain the treatment and calculate the effect on the financial statements. Ethical pressure to understate liabilities can be included, so be ready to comment on it.