IAS 37 seeks to ensure that reasonable identification requirements and calculation frameworks are applied to contracts, contingent liabilities and contingent assets and that appropriate information is reported to the financial statements in the notes to allow users to understand their purpose, timing and amount.
The Standard IAS 37 Provisions, Contingent Liabilities and Contingent assets sets the criteria for recognition and measurement of
- Contingent liabilities
- Contingent assets
An entity organizes a provision if it is likely that the settlement of the provision will require an outflow of cash or other economic resources. If an outflow is unlikely the element will be regarded as contingent liability.
A provision shall be measured at the amount rationally paid by the entity to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Measuring a provision takes into account risks and uncertainties. To its present value a provision is discounted.
Contingent liability is a possible (not present) obligation from past event, which will be confirmed by some future event.
Contingent assets are a potential asset that arises from past events that will be confirmed by some future events not fully controlled by the entity.