**МСФО (IAS) 37 Оценочные и условные обязательства в отчетности по МСФО — Transcript & Summary | SozAI**
Source: https://sozai.app/transcript/ias-37-provisions-contingent-liabilities-reporting/

Webinar on IAS 37 provisions and contingent liabilities, covering recognition, measurement, and practical examples for DipIFR and CIMA students.

## Key Takeaways

- Provisions are liabilities with uncertain timing or amounts, requiring estimation and professional judgment.
- IAS 37 provides guidance on when and how to recognize provisions and disclose contingent liabilities.
- Terminology differences in translation can cause confusion; 'estimated liabilities' is preferred over 'reserves' in Russian.
- Recognition of provisions depends on a past event creating a present obligation and the ability to estimate the amount reliably.
- Financial statements must reflect prudence by not overstating assets or understating liabilities under uncertainty.

## What the video covers

- Introduction to provisions and contingent liabilities under IAS 37, focusing on DipIFR and CIMA course relevance.
- Explanation of the difference between provisions (estimated liabilities) and other liabilities.
- Discussion of a practical example involving a lawsuit and how to account for it under IAS 37.
- Clarification of terminology differences in Russian translations, emphasizing 'estimated liabilities' over 'reserves'.
- Definition of provisions as liabilities with uncertain timing or amount, and the importance of prudence in accounting.
- Three key conditions for recognizing a provision: past event, present obligation, and reliable estimate of the obligation.
- Use of professional judgment and valuation methods to estimate provisions at the reporting date.
- Examples of provisions such as vacation pay and obligations arising from promises or implied commitments.
- Discussion of discounting future obligations to present value and probability-weighted estimates.
- Emphasis on the importance of materiality and professional judgment in financial reporting of provisions and contingent liabilities.

## Chapters

1. 00:00 Introduction and webinar overview
2. 04:55 Options for recognizing liabilities in lawsuits
3. 09:24 Definition and scope of estimated liabilities
4. 13:35 Uncertainty in business and accounting prudence
5. 18:11 Examples of provisions and their accounting treatment
6. 23:17 Recognition criteria and challenges
7. 32:41 Discounting and probability in provision measurement
8. 37:47 Materiality and professional judgment in reporting

Answers

## Questions about this video

What is the difference between a provision and a contingent liability under IAS 37?

A provision is a liability with uncertain timing or amount that is recognized in the financial statements when certain conditions are met, while a contingent liability is a possible obligation that is disclosed in the notes but not recognized because it is less likely or cannot be reliably measured.

Why is the term 'estimated liabilities' preferred over 'reserves' in Russian accounting terminology?

'Estimated liabilities' is preferred because the term 'reserves' in Russian is used for equity reserves and asset adjustments, which can cause confusion. 'Estimated liabilities' more accurately reflects the nature of provisions under IAS 37.

What are the three conditions required to recognize a provision according to IAS 37?

The three conditions are: a past event has created a present obligation, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated.

## Full Transcript — Download SRT & Markdown

00:12

Speaker A

Good evening, dear guests. We are glad. Good evening. At today's webinar on provisions and contingent liabilities, topics from the DipIFR and CIMA courses. My name is Svetlana. I am the program manager at the HockTraining training center. Also with us today is the host of this webinar, Irina Zavalishina. Irina, hello. I am very glad to see you. Good evening, dear guests. Can you see and hear us well? Please, someone put a plus sign in the chat, and we will continue.

00:33

Speaker A

Thank you. Thank you very much. For those who are with us for the first time today, I would like to say a few words about our training center in the field of professional education. Since 2000, that is for 21 years now, we have

00:51

Speaker A

specialized in such international qualification programs as ACCA, CIMA, CIA, and CFA. We have an educational license, which allows our students to receive a tax deduction. And also, when you finish your training, you will be able to receive a certificate of

01:13

Speaker A

advanced training upon successfully passing the mock exam. Our classes take place on the unique online platform Hock My Web. This is also an innovation. We are accredited by ACCA and CIMA.

01:34

Speaker A

Well, in principle, I think that's enough about our training center. A few words about Irina. She is an instructor for the DipIFR and Financial Reporting courses, as well as both parts of CIMA.

01:52

Speaker A

Irina is an IFRS expert and is also the author of several books on this subject and numerous publications. Irina also has extensive practical experience working in companies with foreign investments, which she happily shares with her students in class. Now I am

02:08

Speaker A

passing the floor to Irina. Thank you, Svetlana. Good evening, dear participants of our webinar, dear colleagues. Our topic today is provisions, contingent assets, and contingent liabilities. Well, provisions or estimated liabilities. We will talk now about why there is such a

02:26

Speaker A

double name. So, you can see the summary. We will talk about what provisions are in general, how they differ from other types of liabilities, and what estimates are used to somehow determine their amount. Yes. And the rest of the questions. So, we will go

02:51

Speaker A

through all of this in the context of the DipIFR program. Well, of course, we won't have time for absolutely everything, all the questions, but we will definitely look at the main ones.

03:17

Speaker A

Well, and besides that, yes, a couple of times I will even go beyond the scope of DipIFR. Yes. Well, because these are, so to speak, very important points. I would like you to know about them. This is, in fact, a very

03:30

Speaker A

important question, because there are so many of these provisions around us, and there is even a separate standard dedicated to this, which is called IAS 37. Right. So, now we will look at provisions and estimated liabilities, which are essentially the same thing.

03:46

Speaker A

And why they have this double name. But first, to begin with, I would like us to look at this illustration for our webinar. Well, imagine it's the beginning of December 2020, annual reporting is just around the corner, and a company is hit with a lawsuit

04:09

Speaker A

from a customer claiming a penalty of 20 million rubles. Due to a breach of delivery deadlines, and with annual reporting approaching, the question arises: surely this event must affect our reporting. There are several options here, four in total. You can

04:31

Speaker A

see them. The first option is to recognize a liability in the reporting for this amount of 20 million. The second option is to recognize a liability, but in a different amount.

04:55

Speaker A

We might estimate, for example, that it won't be 20 million, but much less. The third option: do not recognize a liability in the financial statements, but disclose information about it in the notes. Right. And the last option: do nothing at all. Right. So, the

05:07

Speaker A

company's lawyers must assess how likely it is to lose in court and have the client's claim granted. Notice, I am not talking about probability here at all. I'm saying that the lawyers still need to assess the probability, and you are doing great by already

05:30

Speaker A

writing your answers. So, any of these options are actually possible, but for these specific situations, we have IAS 37, which examines in detail what to do and how to act in such cases. And the term used there, if we speak about the

05:48

Speaker A

English term, is "provision." And initially, it was translated as "rezerv" (reserve). But in reality, that is exactly what it is. And the original translation of IFRS into Russian, which was done by Oleg Askeri back in the distant nineties, right? It was called:

06:10

Speaker A

"rezervy" (reserves). And the standard was called: Provisions, Contingent Liabilities and Contingent Assets. But a lot of time has passed since then, and it turned out that in the Russian language, there were just too many "reserves." Right. And so, to avoid

06:32

Speaker A

confusion, it was decided that we would call these "provisions" "estimated liabilities." Well, in essence, that is what it is. It is an estimated liability. While "reserves" is more correctly used for those reserves we have in capital, in equity. Well, for

06:50

Speaker A

example, there is a revaluation reserve for fixed assets, and some other reserves. And there is another way to use this term, "reserve," in Russian, which reflects the adjustment of asset values. A provision for bad debts, an impairment allowance, right? So, three

07:09

Speaker A

English terms are translated into Russian in the same way. That is why it is certainly more correct and accurate to say "estimated liabilities." And if we are preparing financial statements, it is more correct to state in the report that this is an estimated

07:30

Speaker A

liability. But we still use the word "reserve" among ourselves because it is so short. There. "Estimated liability" is quite a mouthful, as they say. There. So, in common parlance, we use the word "reserve." And by definition, we

07:46

Speaker A

will now look at what definition the 37th standard gives, right? It applies to situations where, first, it is impossible to establish the fact of an event. In other words, we don't understand at all whether we have an obligation or not. Maybe we do, and

08:05

Speaker A

maybe we don't. We don't know the timing of settlement, and we may have difficulties with its quantitative measurement. You know, even if we didn't have this standard, in accounting principles, both in IFRS and in our RAS, there is a concept of

08:20

Speaker A

prudence. Well, if we paraphrase it literally, it means the following. In conditions of uncertainty when preparing financial statements, one must take an approach so that assets and income are not overstated, and expenses and liabilities are not understated under uncertainty, and this

08:44

Speaker A

is exactly a condition of uncertainty, because we need to estimate as of the reporting date, but the outcome will be clear later. It will certainly be resolved eventually, but that will be later. And we need to provide it as of

09:08

Speaker A

December 31st. Therefore, we have to apply certain valuation methods and professional judgment. And so, the definition of a provision is a company's liability with uncertain timing or an uncertain amount of settlement. So, from this, we conclude.

09:24

Speaker A

If the timing and amounts of an obligation are clearly defined, then such an obligation is difficult to call an estimated liability. It will either be accounts payable or an accrued liability, but it will not fall within the scope of the standard we are

09:45

Speaker A

considering. And now a very important point: three conditions for recognition. Well, I will say "reserves," if you'll allow me. But in reality, I mean that it is, of course, an estimated liability. And now we will examine in

10:03

Speaker A

more detail the three conditions, which are all equivalent and very important. First, as a result of a past event, a company has a present obligation. So, what is being discussed here is that some event has already occurred, and it

10:20

Speaker A

happened before the reporting date. And as a result of this, the company incurs some kind of obligation. But difficulties arise here in defining what should be considered a past event.

10:38

Speaker A

That is the first difficulty. And second, sometimes there are

10:52

Speaker A

That is the first difficulty. And second, sometimes there are complexities in determining that, although the event occurred, whether we actually have an obligation; we will look at such examples with you a bit later. And the second condition: it can

11:08

Speaker A

be stated with high probability that the fulfillment of this obligation will result in an outflow of resources. That is, we will either pay money or be forced to give up other assets to settle this obligation. And the third,

11:23

Speaker A

no less important condition. After all, if we cannot reliably estimate this amount, then how can we recognize it in the financial statements? Three conditions. And I would like to dwell here on the words, on the word " probability," because "with high

11:42

Speaker A

probability" is still, in general, the main word here is specifically probability. In our Russian language, it is absolutely all the same to us; we do not see a difference between " probable" and "possible," but it is not so in the Anglo-Saxon world. That is,

12:02

Speaker A

for "probable," the word "probable" is used. Right. And that is not at all the same as "possible." What does "probable " mean? It means more likely yes than no. That is, the event is more likely to happen than not to happen. And in

12:22

Speaker A

reality, this means that we are still leaning more toward the fact that it will happen, which means we must recognize some amounts in the financial statements. Now, "possible," or " possible." So, here it is the opposite; it means more likely no than yes. Right

12:46

Speaker A

. And what is the difference between them? 50%. That is, if the probability is greater than 50%, we say that the event will most likely happen, will take place. That is, we have an obligation. And if the probability is

13:03

Speaker A

greater than 50%, then in this case— that is, on the contrary, less than 50% —then in this case we say that the event will most likely not happen, and therefore, we will not reflect the obligation. You know, when I first

13:17

Speaker A

encountered this, it caused me real bewilderment. I thought, who is going to measure this, and how can these probabilities, these 50%, be measured at all? But then, only over time, I understood the deep meaning of this.

13:35

Speaker A

The point is that our entire life is constant uncertainty; our personal life , we don't know what will happen to us tomorrow, and even more so our business life. So, we’ve bought some asset, and are we truly confident that we will

13:51

Speaker A

receive the benefits we originally planned for? But we have no such certainty because who knows what will happen; more efficient equipment might be released, this could become obsolete , and we would have to write it off early. The demand for the products that

14:09

Speaker A

this equipment produces could fall. Well, and so on. Yes. And therefore, to reflect that, well, if you look at IFRS , the word "certainty" is practically never used, but "probability" is.

14:26

Speaker A

It’s like paying tribute to the fact that this uncertainty surrounding us is very great. And no one actually measures these 50%. Most of the time, it is impossible to measure them. It is determined at a qualitative level. That

14:44

Speaker A

is, if you have experience with similar events, you’ve been working for more than a year, right? You have already developed some professional judgment regarding such events. That’s when you can say that it is likely yes, or perhaps it is likely no. That is why

15:04

Speaker A

all three conditions are very important . I focused on probability. Actually, they are all very important. And if even one of the three conditions is not met, well, then we do not have a liability. We don't have a provision,

15:21

Speaker A

but there might be a contingent liability, and we will talk about that a bit later. So, we need some event to have occurred, and it must exist as of the reporting date. And here is an example. Let’s take a look. When we

15:41

Speaker A

need to determine which event is the obligating one. A company signed an agreement with a buyer on December 20th for the supply of equipment. This agreement includes a clause on warranty obligations, but the supply of the equipment itself occurred after the

16:02

Speaker A

reporting date, in January. So, we have a contract, a warranty clause is signed . Do we have a liability as of the reporting date? Well, the first question we must ask ourselves is: Has a past event, the event that is the

16:27

Speaker A

obligating one, occurred or not? Well, yes. And because we have to determine what the event is here. In this case, the event is not the signing of the contract; in this case, the event is the delivery of the equipment. But that

16:48

Speaker A

doesn't mean it will always be exactly like that. The logic here is simple. As long as the equipment hasn't been delivered to the buyer, we have no obligation to repair it, right? But sometimes, you really have to analyze

17:07

Speaker A

each case; sometimes the signing of the contract is the obligating event. Right . But not in this case, no, because there is no equipment for which we have to incur any kind of expenses. And there are cases, if we talk about the

17:26

Speaker A

scope, where recognizing provisions is simply prohibited. Or rather, contingent liabilities, future operating losses, and the repair and maintenance of our own assets, for example, items of property, plant, and equipment. If we repair other assets, those belonging to our buyer, we might

17:49

Speaker A

incur an obligation, but not for our own, because there is no second party. An obligation implies the existence of a second party. And yes, I must also say that standard 37 does not classify as provisions obligations that represent a duty to pay for goods or

18:11

Speaker A

services already delivered; that is our accounts payable, which is covered by other international standards. Well, for example, let's take a provision for vacation pay. We all know this is a provision, an estimated liability, right? However, this standard does not

18:32

Speaker A

address these specific obligations because there is a special standard, IAS 19, which is called Employee Benefits. And that is the context in which we must discuss it. But standard 37 is not intended for such obligations . So, the main question. We have agreed

18:57

Speaker A

on the first one. Does an obligation exist at the reporting date? An obligation exists when we inevitably have to pay. Meaning it cannot be changed. If it can somehow be changed and this payment can be avoided, then we do not recognize an obligation. And

19:22

Speaker A

here, as an example, I want us to look at a case where new legislation has been enacted. As the standard says, the mere enactment of legislation is not sufficient grounds for an organization to have a present obligation. Right.

19:43

Speaker A

Let's look at an example together. This is actually an example directly from the DipIFR exam. So, on March 1, a law was passed requiring the company to install new control filters. By June 30 . It is estimated that this will cost 4

20:08

Speaker A

million rubles. But there isn't enough money. And it hasn't been done. And according to management's estimates, the company will most likely face penalties in the amount of 1. 400.

20:24

Speaker A

Right. So, the question here is, as usual, the first question: does an obligation exist for us? And if it exists, what is the amount of the obligation? What do you think? Here is the answer to the first question. Yes,

20:49

Speaker A

you are right. Does an obligation exist ? Uh. We must reason that the company can avoid it. It has an alternative to these future costs of changing the filter. Although, in my opinion, this argument isn't very serious, yes, it

21:13

Speaker A

can avoid it by changing its operating mode, but excuse me, it’s not so easy to just go and change the operating mode. Just imagine, you have to get rid of this equipment, you have to buy something else, such expenses, and

21:31

Speaker A

completely rebuild everything. Nevertheless, we must take this point into account, because apparently, such situations have occurred in practice, and that is why this provision was included in the standard. So, if a company potentially has the opportunity to avoid these expenses, then it has no

21:55

Speaker A

obligation. Do you understand? That is why an obligation regarding the installation of filters should not be recognized. As for these financial sanctions, well, they cannot be avoided . There is certainly no alternative here. And therefore, you are absolutely

22:21

Speaker A

right, those who wrote that the obligation should be recognized in the amount of 1,400 thousand rubles. There.

22:33

Speaker A

So, a past event, yes, at the core is a past event, we remember, and this past event in the context of the standard is called an obligating event. And this event can lead to the emergence for the company of either a legal or, look here

22:52

Speaker A

, the second one, you see, I have written "conclusive," constructive. Well, other terms can also be used, for example, traditional, actual. But still , in the official translation, which is on the Ministry of Finance website, the term "conclusive obligation" is used.

23:17

Speaker A

Alexey, even if the company doesn't want to, in any case, we cannot throw out this standard provision. Of course, the company most often doesn't want to, and perhaps cannot, but it potentially has the opportunity. That’s how it is

23:34

Speaker A

. I agree with you too. I’m not entirely convinced by this norm, but nevertheless, apparently, some serious practical situations prompted the IASB to include this provision after all. So , a legal obligation can be either conclusive, or constructive, that is,

23:56

Speaker A

the one which, by definition, is also recognized in accordance with established practice. That is, there are no contracts that can oblige us to do this. But as a result of our entire practice or our statements, communicated to everyone, announcing

24:19

Speaker A

that this is how we do things, everyone expects exactly this action from us. There. And, so, more details about these two types. So, a legal obligation is clear; it’s linked either to a contract—for example, we sold products, and we have obligations for

24:41

Speaker A

warranty repairs or maintenance—or to legislation, like fines, or to the practice of applying the law, meaning a court decision must be carried out.

24:53

Speaker A

That part is all clear. But the second type, called "implied" on the Ministry of Finance website—though the term " constructive" is also used—refers to obligations stemming from the company's actions, where the company has demonstrated to third parties its

25:14

Speaker A

readiness to take on certain duties. So , as I said, I agree with you. I don't really like this rule either, but evidently, there's something about it I don't fully grasp. Well, you see, this point was actually introduced later

25:39

Speaker A

into the standard regarding avoidance, not from the very beginning. So, look, on one hand, we have the concept of prudence; we shouldn't underestimate the amount of an obligation. On the other hand, in the early 2000s, another rule was introduced: neutrality of

26:03

Speaker A

reporting. That is, we shouldn't overestimate obligations either, because in some cases it’s beneficial to underestimate liabilities, while in others, to overestimate them. Basically , to limit these possibilities from both sides, these types of rules were adopted. So, you cannot fail to fulfill

26:27

Speaker A

this obligation, even though we haven't signed any contract and there is no law that can force us to do so. Well, as far as a legal obligation goes, I think we can agree that if there is a clause

26:43

Speaker A

in a contract, we must fulfill it. We have an obligation. Warranty repairs, for instance, are a very good example.

26:55

Speaker A

If we talk about implied or constructive obligations, let's look at a couple of examples—some non-standard ones—because people always cite the example of some conglomerate mining ore in Africa where there is no environmental legislation at all. They damage the environment,

27:17

Speaker A

but they are known as protectors. of the environment. Therefore, even if there is no such legislation, they will still compensate for the damage caused.

27:29

Speaker A

There we go. And as for implied or constructive obligations, there can actually be a great many examples. I have chosen two. So, the first example is this: at a meeting dedicated to City Day, The director of a large factory,

27:53

Speaker A

well, just to show some initiative, promised to help renovate the city hospital. The city leadership, of course, immediately grasped the idea and welcomed the decision. Now that everyone knows the director made a promise, implied obligations arise, even though he didn't sign any

28:16

Speaker A

contracts. Or another example. The Vesna company provides annual assistance to an orphanage. And the orphanage has already grown accustomed to receiving a certain sum of money every year. They simply include it in their budget. Right. And at the same

28:36

Speaker A

time, the director didn't make any statements about future aid. But all the previous practice suggests that such an obligation exists. However, it's important to note the following point. The determining factor is the public nature of the information.

28:56

Speaker A

Meaning, it’s not just you who knows about it, having decided it for yourself. The other party knows about it. That other party. Well, it could be the entire public, or another organization, it doesn't matter. Right.

29:10

Speaker A

Because if your intention to do something hasn't been communicated to third parties, no implied obligation exists. This is also linked to the fact that a company might decide something today and then change its mind if no one else knows. Right. But if this is

29:33

Speaker A

public information or an established practice, then implied obligations arise. Now we will talk about how provisions are measured, what methods for measuring them exist, and a number of other related questions. And, as stated in the standard, the best

29:57

Speaker A

estimate of expenditures is required. The best estimate of costs, for example , is the immediate settlement of the obligation. If it were now, what would the cost amount be? Or the transfer of the obligation to a third party;

30:14

Speaker A

essentially, it's the lower of these two. But it should be noted that sometimes our obligations can be deferred for several periods. That is, the obligation arises, the event has occurred, but we have to pay in two, three, or maybe even more periods. That

30:36

Speaker A

is when the duty to discount this amount also arises. And one must also consider expected future events, such as changes in legislation or technology that might affect the amount of this obligation. And as you can see, you shouldn't understate the obligation,

30:56

Speaker A

nor should you inflate it. Right. Let's take a look at an example. A company will have to pay 12,000 in compensation , presumably in 2 years. Let's look at this. 12,000 in 2 years or 12,000 dollars today. These are not the same

31:30

Speaker A

thing. Do you agree with me? So if it is today, then 12,000 will indeed be our liability. But if it is in 2 years, then the amount will likely be less.

31:43

Speaker A

The present value should be less because, well, 12,000 today and 12,000 in 2 years are different amounts of money. There. Well, in this case, the liability must be recognized as of the reporting date of the twentieth year, taking discounting into account. We

32:01

Speaker A

take a rate of 5%. And we also need to see here what happens next with this liability, how it changes if we have discounted it. Well, in accordance with IAS 37, we must recognize the discounted amount of future cash flows

32:22

Speaker A

as a liability. In both the first and second year, by the end of the first year—which we are talking about now —the value of the liability should increase by the amount of interest expense. And this amount is calculated

32:41

Speaker A

by applying the same rate at which we discounted it to the carrying amount of our debt here. So, 12,000 dollars is our future value, right? But we need the present value. That is, on December 31, 2020, we must discount it, meaning

33:08

Speaker A

we remove the 5%discount twice, for two periods. There. And the resulting sum is no longer 12, but 10,884. So, it is created, and a reserve or provision is reflected in our financial statements for the amount of 10,884, and expenses

33:33

Speaker A

are reflected. Most likely, these are operating expenses, which is very important. And next, we need to understand what the amount will be at the end of the first year and what interest we need to calculate. So, the interest, the 5%rate is applied to this

33:58

Speaker A

amount that we calculated. Yes, that is absolutely correct, 544. There. And note that here we have interest expenses. That is, when we create a reserve, our expenses are usually operating expenses. There. But when we subsequently unwind this reserve, we

34:23

Speaker A

will have financial expenses reflected. Thus, the liability at the end of the first year will grow to reach the amount of 11,428. So, this is all standard 37 regulation. If the initial amount of the reserve is estimated taking discounting into account, then

34:48

Speaker A

subsequently the amount of the liability grows. And we must account for it in this way. We must reflect financial or interest expenses each year as we approach the payment date.

35:04

Speaker A

Now, methods for estimating reserves. Well, there are generally two extreme methods, which are opposite to each other. The first is called the expected value method. And it is applied in cases where, when estimating a reserve, there are a large number of possible

35:28

Speaker A

outcomes, so we must weight each possible outcome and calculate the expected value this way. So, it's sort of, well, roughly the average temperature in the hospital. In reality , the amount won't be that, but it's the closest to what might happen. There

35:49

Speaker A

. But if there is a wide range of possible outcomes and they are equally likely, then we just take the average value. So, here you see we have five options in the picture below, different values, yes, but their probability is

36:07

Speaker A

the same. We then just take the average value. There. But when estimating a single individual obligation, the most likely result is taken as the basis.

36:23

Speaker A

Right, well, I told you that we would go beyond the IFRS scope here. So, even in such a case, we must consider other possible hypotheses. We are going to look at that now. So, calculating the expected value. I think you all know

36:42

Speaker A

logical examples. When we calculate what the warranty repair obligation is, we can estimate, based on experience from previous years, what repairs will be needed and the probability of that.

37:00

Speaker A

There. And therefore, this amount is calculated, in general, simply by... multiplying the probability by the possible outcome or result, yes, and in this way, we sum up all these weighted costs and get the expected value. So, 400 will be our obligation. Now, a

37:26

Speaker A

different case. We have one single obligation. According to lawyers ' estimates, the probability that the bank will be forced to pay is about 80% . There. So, there is a 20%probability that we won't have to pay. Do we need

37:47

Speaker A

to weight those 80%and 20%? Yes. There. No, here we take the most likely result as the basis. So, we must recognize an obligation for the amount of one million, because there is an 80% probability that we will have to pay,

38:05

Speaker A

and if we do have to pay, we won't pay 80%, but the full million. That is why you see a completely different approach here. But I want to draw attention to one more point: this reserve must reflect the assessment from the

38:23

Speaker A

company's perspective. It's how the company views it, because the company is likely most deeply immersed in the nuances of the case and the situation.

38:35

Speaker A

Therefore, the company's point of view is the most important here. And in the IFRS department. To correctly report these reserves or estimated liabilities , at each reporting date, you must request a list of lawsuits in which the company is a defendant. And include the

38:57

Speaker A

lawyers' opinion on the probability. For example, a lawsuit filed against the company before the reporting date.

39:06

Speaker A

We have constant lawsuits today for 10 million due to the violation of delivery deadlines. The lawyers believe the probability is high, but they are confident that the counterparty misinterpreted the contract terms and overstated the claim by 3 million. That

39:25

Speaker A

is, despite the fact that we know the claim amount is 10 million, our lawyers are certain that we will pay less. And this means that in this situation, we must recognize a liability in the amount of 7 million. Because that is

39:45

Speaker A

precisely our estimate. Now, moving beyond that, as I told you, there is such a provision in standard 37. If a provision is a single obligation and involves one possible outcome, then, of course, as we did, the best estimate is

40:10

Speaker A

the most likely result. But you see a big "but" here and exclamation marks. Even in this case, it is necessary to take into account other possible outcomes. And if these other possible outcomes are significantly higher or significantly lower than the most

40:35

Speaker A

likely result, then our best estimate of this reserve must take this fact into account. That is, it will be either higher or lower than the value that we calculated or that is the most likely one. So, what does this look

40:58

Speaker A

like? Let's look at an example together . Ah, yes, I see the question about tax risks. Some I cannot read, but I can see this one. Yes, we will talk about that now. A buyer has filed a lawsuit,

41:14

Speaker A

and the company's lawyers, based on past experience—meaning they calculated similar court cases and what decisions were made there—have provided this forecast: there is a twenty percent probability that the company will have to compensate for damages in the amount of one million

41:36

Speaker A

rubles. But still, it is most likely that we will have to pay only 400,000 for material damage. So, 400,000 is the most likely outcome, right? Yes. But the court decision is expected to be handed down in about a year. And we

42:02

Speaker A

must take a discount rate here, since it is in a year, we will have to discount it, right? at 8%. So how should we estimate our provision in this case? As we just said, we take the most likely amount of 400,000. But

42:23

Speaker A

remember the rule we were just talking about. Since the other possible outcome is significantly higher than the most likely one, the best estimate must include and account for this. This means that in reality, the amount we report in the financial statements

42:46

Speaker A

should be greater than 400. And we must calculate the weighted average value taking into account the probabilities.

42:53

Speaker A

Oh, I mixed something up here, didn't I , friends? Or did I? I think the probabilities are different. So, there it was 2080, and here it is 2575. Yeah, well, okay, let's forgive me for this little detail. So, in short, you

43:13

Speaker A

understand, right? It means we have the most probable result, but the other outcome differs too much from the most probable one. And then, you see, we would have to recognize not 400, but 675,000. There. Now let's look at

43:38

Speaker A

another example based on these same figures. Anoth-er example. So, well, a lawsuit was filed. The company's lawyers now believe that we will have to pay, meaning a 25%chance of 450,000, a 50%probability of 400,000, and a 25% chance of 350,000. Well, in short, it's

44:03

Speaker A

all fairly compact and centered around 400,000. In this case, we can disregard the fact that one—even if we calculated the weighted average cost, it would still be about the same. And therefore, in this case, we ignore it.

44:27

Speaker A

Well, firstly, it's not significantly larger, it's just a little bit more and less than the probable result, right?

44:34

Speaker A

Therefore, here we can neglect the fact that we have other probabilities and other values and still settle on the most probable one, which is 400,000.

44:50

Speaker A

There. And now, one more example. Let's take a look. The data is the same. The very same. But, however, the lawyers believe that with a 70%probability the company will win the case and pay nothing at all. But there are other

45:15

Speaker A

options as well. Do you think we have a liability here or not? Does the company need to show in its reports that it has some liability in connection with this?

45:37

Speaker A

You guys are great. Well, in this case, we have a contingent liability, right? We will talk about contingent liabilities in more detail with you now . Well, I mean, look at what is not being met. The probability condition is

45:56

Speaker A

not met. The probability that there is a liability, that we will have to pay, is less than 50%. There. And in this case, we do not report it. So it's more of a "no" than a "yes." So, how do we

46:18

Speaker A

determine the materiality level? Well, this is a question that is more qualitative than quantitative. How do you think—in every organization it can be different, but if you average it out, you could say, take 10%of some base. There. Or the item itself might

46:43

Speaker A

be such that it is material by its very nature, for example, share capital. Even if it might be small, it is still a very significant item, so you need to consider not just the amount, but also its nature. So, we do not reflect

47:04

Speaker A

contingent liabilities in our financial reporting. And very often, you need to apply professional judgment to determine, first of all, what Andrey is asking, and whether the materiality level is significant for us or not.

47:20

Speaker A

Right. Well, in general, the materiality level should be somehow formally established, although it can be different in various cases, but in any case, you must have some criteria for this. So that you have them, and you aren't just pulling random figures

47:40

Speaker A

out of thin air every time. Now, another important question. What if we have to pay damages to a client, but that amount is reimbursed to us by another party? Right. You see, compensation is subject to recognition only when its receipt is virtually

48:09

Speaker A

certain. And that is a direct rule from the standard. Meaning, we can recognize this compensation not when we receive the money, once we get it from, say, our supplier who reimbursed us. But rather when there is virtually no doubt

48:34

Speaker A

left. Right. And another question. Can we offset assets, liabilities, income, and expenses in this case? Let's look at this with an example. Using numbers: one of the buyers, won a case and is entitled to receive a sum of $ 2,000.

49:04

Speaker A

This supermarket can receive reimbursement. The supplier is reliable and has confirmed the reimbursement in writing. Well, discounting is applied when the period exceeds one year. You, of course, can apply it for less than a year if you want, but generally, it's

49:28

Speaker A

for more than a year. And the period then requires mandatory discounting. So , how will this situation be reflected in the reporting? The fact that the supplier is reliable. Evgeniya, excellent. The fact that the supplier is reliable means we have virtually no

49:48

Speaker A

doubt, and they have confirmed the reimbursement in writing. So, we record the provision or liability: debit expenses, credit the provision or legal liability, and a second separate entry.

50:08

Speaker A

We recognize that we will have compensation. On one hand, it's a receivable, and on the other, we must show income. Meaning, if we have a provision or liability, then when we receive the reimbursement, it will be income for us. So, the question is: is

50:39

Speaker A

it possible to offset these amounts? So , I said 10%of some base, not from, For example, regarding assets, if you are talking about assets, or liabilities, if you are talking about liabilities.

51:09

Speaker A

So, is offsetting possible? Opinions are divided. Well, let's take a look at this together now. Offsetting is possible—green light—in the case of expenses and income, because it reflects a real fact, but we have neither expenses nor income; however,

51:34

Speaker A

you cannot offset an asset and a liability. Why do we record liabilities ? Because under the contract, we are the party with that obligation. And we have to pay our buyer. That is our liability. That is why offsetting is

51:55

Speaker A

not permitted, since the liability must be reflected in our financial statements, given that it exists. There . So, expenses and income can be collapsed, but assets and liabilities cannot. Now, let's look at another example of a provision. This is an

52:13

Speaker A

obligation for the decommissioning of fixed assets. Well, there are many examples, of course, but I have provided two here. It arises for organizations whose activity is connected with the development of natural resources; they have an obligation for land reclamation when

52:31

Speaker A

everything is finished. Right. But here is another more down-to-earth example, one that is more frequent. In the case of a long-term lease, yes, if you lease a building and make non-removable improvements—for example, building some kind of permanent partitions—and

52:51

Speaker A

there is a contractual obligation to return the object in, say, 10 years in its original condition, that is, to demolish all the partitions, then an obligation arises for us to liquidate them. There. Well, of course, you can't do without discounting here, since our

53:14

Speaker A

obligation will not be fulfilled immediately, but in many years. Right. And in this case, remember, we wrote the entry: debit expenses, credit provision. But in this case, the value of the provision is included in the cost of fixed assets, increasing their

53:34

Speaker A

value, since it is a necessary expense for us to be able to derive benefits from this asset. There. And the example here is: a company operates an offshore oil field. According to the license agreement, the platform must be

53:56

Speaker A

dismantled. Then the seabed must be restored, so there is an obligation. A provision must be recognized. We don't know the exact amount at all. We are estimating how much it will cost us in many years, perhaps in decades. There.

54:21

Speaker A

But in fact, the obligating event has already occurred, so it is necessary to recognize the provision here and account for it specifically as part of the cost of the oil platform. Let's talk about contingent liabilities and contingent assets, yes, how they differ

54:43

Speaker A

from provisions. Well, you remember the three criteria for a liability. First. As a result of a past event, we have an obligation, a duty that has arisen.

54:56

Speaker A

Second, there is a high probability that we will have to pay. And third, that we can reliably estimate how much to pay. If at least one of these three criteria is not met, then we have a contingent liability. So, neither

55:16

Speaker A

contingent assets nor contingent liabilities are recognized in the financial statements, right? Disclosure is required. You can look at the financial reports of large companies.

55:26

Speaker A

Practically all of them have contingent liabilities, and they disclose this fact. The exception where a contingent liability is recognized is if a business combination transaction has occurred, and contingent liabilities arise within the framework of that deal . That's it. But we won't be talking

55:48

Speaker A

about that. We already have plenty to discuss as it is. So, what is a contingent liability? Let's talk about it in detail. It is a possible obligation. The first definition, so to speak, the first aspect. Meaning, we don't know if an obligation exists or

56:06

Speaker A

not. That is, the first condition for recognizing an obligation is not fully met here. So it is unclear if an obligation exists, and please note, it is a possible obligation, yes? That is, a past event occurred, but only in the

56:25

Speaker A

future can we say for sure whether we have an obligation or not. Once something happens, some events occur or , conversely, fail to occur, only then can we clearly tell. I can give an example here that I always acknowledge,

56:41

Speaker A

I always tell this story. In reality, it happened many years ago, but it is quite illustrative. A large electronics store announced a sale, a sale of laptops for 10,000 rubles. While sales are a common occurrence now, about 12

57:03

Speaker A

or maybe 15 years ago, it was still a rarity. And imagine, so many people came to the store; they certainly prepared, knowing that many people would show up. They had everything planned in the sales floor, people were there who were supposed to keep order,

57:23

Speaker A

but nothing worked out. Such a crowd surged in that it swept everything in its path. Many were injured and ended up in the hospital. Naturally, the question arose that they wanted to file lawsuits to have their damages compensated, both material, since they

57:49

Speaker A

ended up in the hospital, and moral, of course. So, this electronics store. This happened in November, right? And the reporting date is just around the corner, so the electronics store is analyzing. Do they have an obligation, what do you think? I mean, they seemed

58:13

Speaker A

to have planned everything; they actually wanted to make things better, right? To host a celebration. They are a few people there, well, to keep order . And they hired and, A, yes. And just imagine, in this situation, right, the

58:37

Speaker A

store thinks it’s not at fault. Well, what are they at fault for, really. But , you understand, considering that people were hurt and the court might side with the victims in this case, they still think it’s possible, but

58:54

Speaker A

more likely not. So they aren't admitting it yet, right, there is no court decision, and they just don't admit it. They hope that they will be able to, well, win if the case goes to court. There. So, do we not see the

59:13

Speaker A

first sign here, right? Meaning it’s unclear whether there is an obligation or not. In this case, conditionally, this obligation definitely exists, and they must disclose all information in the notes. roughly estimate, in general , how much it will cost them, if

59:31

Speaker A

possible. Now, here is a different approach. Meaning, a contingent liability is a current obligation. That is, the obligation exists and it’s determined that it exists, linked to a past event, but it isn't recognized.

59:50

Speaker A

Why? Either because it’s unlikely— I’m translating from standard language into common terms here. Meaning, it’s unlikely that payment will be required. It’s unlikely that payment will be required. So, our second condition of probability is not met, or the amount of the obligation

60:15

Speaker A

cannot be measured with sufficient reliability. So the third condition for recognizing an obligation is not met.

60:27

Speaker A

And here, regarding the estimate, right , in fact, it’s very often impossible to estimate, but there isn't enough data because this moment, right, of settling the obligation, it can be deferred and depend on future events.

60:45

Speaker A

But I can give you an example. Remember , for opening a loan account, banks had to be paid a fee. Businesses paid commissions. Right. But then a decision was made that this was unlawful, that businesses shouldn't have to pay money

61:08

Speaker A

for this. And, well, many began to contact banks with demands to return the commissions they had already paid.

61:19

Speaker A

So, well, those who asked, the bank returned it to them; well, they say they didn't return it to everyone, but, in general, they returned it to some.

61:27

Speaker A

And, well, this reached such a scale here in Moscow, at least, that even the Central Bank reached out to the banks so they could estimate their potential losses from having to pay these amounts back. Well, this bank, you see, wanted

61:49

Speaker A

to estimate it, but couldn't because it didn't know who would come to them. Maybe some businesses no longer exist.

61:58

Speaker A

Some have moved to another region or country, while others have remained at the bank but will no longer sour their relationship with it. In short, the banks could not estimate them mostly and disclosed them as contingent liabilities. Right. And this is also a

62:19

Speaker A

good example of a contingent liability. Although the obligation is a current obligation, that is, an existing one.

62:27

Speaker A

And yet, it cannot be recognized. As for contingent assets, they are significantly fewer than contingent liabilities. That is, by definition, it is a very similar possible asset linked to past events, but its existence will be confirmed only in the future when

62:49

Speaker A

events occur—or fail to occur—that we cannot influence. So, a contingent asset. What is an example? The same example we considered: a supplier promises to reimburse us, but we have no near-certainty that we will receive it. We hope we will receive it, but we

63:11

Speaker A

are not very confident, so it remains a contingent asset for us. Right. In fact , there are far fewer of them. That is, it is not a real asset. Right. There are a few special situations also considered in this standard and in the

63:31

Speaker A

DipIFR program. Future operating losses . This is an example from the standard itself. Can we create provisions for future operating losses? The answer is no. And here is an example. A furnace has a lining. It’s a type of coating

63:54

Speaker A

—the most expensive part, a component , so to speak—that must be replaced every five years for technical reasons.

64:02

Speaker A

The fact that it needs replacing is not the same as having an obligation. We have no obligation to anyone to replace it. At the reporting date, the lining has been in use for three years. Should we create a provision? But you remember

64:16

Speaker A

, we have touched on this topic several times already. We have no obligation, correct? There is no second party involved. For the maintenance and repair of our own assets, provisions are not recognized. If it were someone else's furnace that we were hired to

64:37

Speaker A

service, then a provision would arise. So, the answer here is clear. A current obligation does not exist, therefore, no provision is recognized. Karina asks : "What about fire safety inspections?" Remember, we had an example similar to new tax legislation. We could simply

64:58

Speaker A

change our business activity, right? Although it’s not exactly a hundred percent foolproof argument, it still exists. So, we do not create provisions for future operating losses. Are there any exceptions to this rule? What do you think? In the budget? Yes. In the

65:30

Speaker A

budget, you will probably account for it in the year when you make the changes. Right. So, about the exception . There is an exception to this rule.

65:41

Speaker A

It is called an onerous contract. That is, if we are a party to an onerous contract, then we are required to recognize losses and liabilities for this onerous contract. So, an onerous contract is a contract in which the

66:03

Speaker A

costs of fulfilling it exceed the benefits from this contract. That is, the expenses for it are greater than the income. That shouldn't happen with a normal contract, right? But if it does happen, then we have an onerous contract. And here we must make a

66:25

Speaker A

disclaimer: if the contract can be terminated without paying penalties to the other party, then there is no need to recognize any liabilities for it.

66:38

Speaker A

That is, if we can terminate without paying penalties. But most often this doesn't happen, we don't get that gift.

66:47

Speaker A

If we terminate, we most often have to pay a penalty. Right. And then, if as a result of some events the contract becomes onerous, it falls under the scope of this standard. And we must recognize the liability. Let's look at

67:05

Speaker A

an example. So, a company works in the consulting field. They provide consultations for a fixed fee of 100,000 rubles. per month starting from November 1st, 2020. When preparing the 2020 financial statements, the company reviewed its future costs and concluded

67:40

Speaker A

that direct costs under this contract amount to or will amount to 120,000, that is, more. Well, this could be due, for example, to an increase in employee salaries. Well, all sorts of such situations can occur. And the costs of

68:04

Speaker A

terminating the contract amount to 300,000 rubles. So the question is: is the contract onerous? Well, it's very easy to calculate that it is onerous, yes, and that it must be reflected in the reporting. Well, that is, we calculate that we have to incur 20,000

68:27

Speaker A

more in costs each month than we receive in reimbursement. So, 200,000 rubles. And the termination costs are 300,000. Note that we must only consider direct expenses that are directly related to this contract. No distributed overhead costs are taken

68:48

Speaker A

into account here. And we must recognize a provision in the financial statements for the lower of these two amounts. So, a couple of questions, or rather, a few words about disclosure.

69:11

Speaker A

Look at how many types of contingent or estimated liabilities we have. You see, right? And so, it is desirable, of course, to disclose information for each category separately, yes, this was for the month of 100,000. And look, I

69:30

Speaker A

want to give you an example, especially since there was a question about this. Reserve for tax liabilities. I have seen various financial statements from large companies, and almost all of them recognize either a provision or a contingent liability. But in this

69:50

Speaker A

report provided here, you see that they even specify that they have potential liabilities for tax risks related to VAT, excluding those that are unlikely.

70:04

Speaker A

In other words, they don't include the unlikely ones, but there are risks that are highly probable in the amount of 52 million rubles. They recognized this liability; they write that it is their estimate and arises as a result of

70:24

Speaker A

uncertainty in the interpretation of legislation. There. And so, they write that the group may additionally be exposed to other potential tax risks relating to VAT. And, of course, they add that management intends to vigorously defend the positions and

70:50

Speaker A

interpretations used in calculating the taxes. Should they be challenged by tax authorities. This is the first example of disclosure. I also wanted to give you this example. IAS 37 allows for not disclosing all information if it is confidential in nature and could cause

71:15

Speaker A

harm. So, here is exactly what is written. In extremely rare cases, disclosure of information would be expected to prejudice seriously the position of the entity in a dispute with other parties. And in such cases, you may choose not to disclose the

71:35

Speaker A

information. There. But not entirely not disclose, right? You must still disclose the general nature of the dispute and indicate why such information was not disclosed. Meaning you cannot just refuse completely. And look, here is an example of such a

71:58

Speaker A

disclosure. Now, regarding the new amendment to IAS 37, I can't say anything yet. Here is an example of disclosure for when you believe that more in-depth disclosure could harm you . Well, generally speaking, we are coming to the end now. And in

72:38

Speaker A

conclusion, a couple of questions, just so you can check yourself. Let's take question one. So, here is the premise, and the answer options. Right, everyone is correct. Why this specific answer option? Well, because we said that the company's own assessment is what

73:42

Speaker A

matters. Management makes the decision to adopt one estimate or another because they are responsible for all data included in the financial statements. That is why the opinion of the company's management is paramount.

74:00

Speaker A

And now, the second question. So, here we need to answer for two years effectively, because the estimates have changed. There. And we need to say how it will be for 2020 and 2021. So, look, and why? And because somewhere the

75:18

Speaker A

company's lawyers were confident until December 31, 2020, that the company would not be found guilty. I mean, they are certain, you understand? It’s not just about probability; they are sure they are not guilty. If they are certain, then we have no obligation at

75:35

Speaker A

all. That is precisely why the answer here is that nothing needs to be recognized in 2020, while the liability is recognized in 2021. And look, the fact that a different assessment was made in 2020 does not constitute an

75:51

Speaker A

error. Our assessment simply changed, so we should not revise it. So, option C here would be incorrect. We do not revise past assessments. Only if there were an error, yes, we would have to revise it, that information from the

76:09

Speaker A

previous year. That is why the correct answer here is. A Well, colleagues, that is all from me. I would now like to give the floor to Svetlana. with a bonus.

76:29

Speaker A

Yes, I am here. Thank you very much, Irina. It was very informative and interesting, I think, for everyone who attended. If you have questions, Irina and I are here. I will assist you with any administrative questions regarding the training. For questions concerning

76:47

Speaker A

IFRS. Irina is here. So, if there are no questions, I think we will wrap up, my friends. Thank you very much for participating. All the best and see you next time. And we will always be very happy to see everyone in

77:09

Speaker A

our courses. Have a good evening, everyone. Thank you very much for being with us today.

Topics: IAS 37 provisions contingent liabilities estimated liabilities DipIFR CIMA financial reporting IFRS accounting standards professional judgment

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