Overview of IFRS 9

Initial measurement of financial instruments

All financial instruments are initially measured at fair value plus
or minus, in the case of a financial asset or financial liability not
at fair value through profit or loss, transaction costs. [IFRS 9,
paragraph 5.1.1]
Subsequent measurement of financial assets
IFRS 9 divides all financial assets that are currently in the
scope of IAS 39 into two classifications - those measured at
amortised cost and those measured at fair value. Classification
is made at the time the financial asset is initially recognised,
namely when the entity becomes a party to the contractual
provisions of the instrument. [IFRS 9, paragraph 4.1.1]
Debt instruments
A debt instrument that meets the following two conditions can
be measured at amortised cost (net of any writedown for
impairment) [IFRS 9, paragraph 4.1.2]:
o

Business model test: The objective of the entity's

to exist: fair value through profit or loss (FVTPL) and amortised

cost. Financial liabilities held for trading are measured at
FVTPL, and all other financial liabilities are measured at
amortised cost unless the fair value option is applied. [IFRS 9,
paragraph 4.2.1]
Fair value option
IFRS 9 contains an option to designate a financial liability as
measured at FVTPL if [IFRS 9, paragraph 4.2.2]:
o

measurement or recognition inconsistency (sometimes

referred to as an 'accounting mismatch') that would
otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different
bases, or
o

and its performance is evaluated on a fair value basis, in

contractual cash flows (rather than to sell the instrument

accordance with a documented risk management or

prior to its contractual maturity to realise its fair value

investment strategy, and information about the group is

changes).

provided internally on that basis to the entity's key

Cash flow characteristics test: The contractual

management personnel.

terms of the financial asset give rise on specified dates to

A financial liability which does not meet any of these criteria

may still be designated as measured at FVTPL when it
contains one or more embedded derivatives that would require
separation. [IFRS 9, paragraph 4.3.5]
IFRS 9 requires gains and losses on financial liabilities
designated as at fair value through profit or loss to be split into
the amount of change in the fair value that is attributable to
changes in the credit risk of the liability, which shall be
presented in other comprehensive income, and the remaining
amount of change in the fair value of the liability which shall be
presented in profit or loss. The new guidance allows the
recognition of the full amount of change in the fair value in the
profit or loss only if the recognition of changes in the liability's
credit risk in other comprehensive income would create or
enlarge an accounting mismatch in profit or loss. That
determination is made at initial recognition and is not
reassessed. [IFRS 9, paragraphs 5.7.7-5.7.8]
Amounts presented in other comprehensive income shall not
be subsequently transferred to profit or loss, the entity may
only transfer the cumulative gain or loss within equity.
Derecognition of financial assets
The basic premise for the derecognition model in IFRS 9
(carried over from IAS 39) is to determine whether the asset
under consideration for derecognition is: [IFRS 9, paragraph
3.2.2]

cash flows that are solely payments of principal and

interest on the principal outstanding.
All other debt instruments must be measured at fair value
through profit or loss (FVTPL). [IFRS 9, paragraph 4.1.4]
Fair value option
Even if an instrument meets the two amortised cost tests, IFRS
9 contains an option to designate a financial asset as
measured at FVTPL if doing so eliminates or significantly
reduces a measurement or recognition inconsistency
(sometimes referred to as an 'accounting mismatch') that
would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases.
[IFRS 9, paragraph 4.1.5]
IAS 39's AFS and HTM categories are eliminated
The available-for-sale and held-to-maturity categories currently
in IAS 39 are not included in IFRS 9.
Equity instruments
All equity investments in scope of IFRS 9 are to be measured
at fair value in the statement of financial position, with value
changes recognised in profit or loss, except for those equity
investments for which the entity has elected to report value
changes in 'other comprehensive income'. There is no 'cost
exception' for unquoted equities.
'Other comprehensive income' option
If an equity investment is not held for trading, an entity can
make an irrevocable election at initial recognition to measure it
at fair value through other comprehensive income (FVTOCI)
with only dividend income recognised in profit or loss. [IFRS 9,
paragraph 5.7.5]
Measurement guidance
Despite the fair value requirement for all equity investments,
IFRS 9 contains guidance on when cost may be the best
estimate of fair value and also when it might not be
representative of fair value.
Subsequent measurement of financial liabilities
IFRS 9 doesn't change the basic accounting model for financial
liabilities under IAS 39. Two measurement categories continue

the liability is part or a group of financial liabilities

or financial assets and financial liabilities that is managed

business model is to hold the financial asset to collect the

doing so eliminates or significantly reduces a

an asset in its entirety or

specifically identified cash flows from an asset (or a

group of similar financial assets) or

a fully proportionate (pro rata) share of the cash

flows from an asset (or a group of similar financial
assets). or

a fully proportionate (pro rata) share of specifically

identified cash flows from a financial asset (or a group of
similar financial assets)

Once the asset under consideration for derecognition has been

determined, an assessment is made as to whether the asset
has been transferred, and if so, whether the transfer of that
asset is subsequently eligible for derecognition.
An asset is transferred if either the entity has transferred the
contractual rights to receive the cash flows, or the entity has
retained the contractual rights to receive the cash flows from
the asset, but has assumed a contractual obligation to pass
those cash flows on under an arrangement that meets the
following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5]
o

transferable independently of that instrument, or has a different

counterparty, is not an embedded derivative, but a separate
financial instrument. [IFRS 9, paragraph 4.3.1]
The embedded derivative concept of IAS 39 has been included
in IFRS 9 to apply only to hosts that are not assets within the
scope of the standard, Consequently, embedded derivatives
that under IAS 39 would have been separately accounted for at
FVTPL because they were not closely related to the financial
host asset will no longer be separated. Instead, the contractual
cash flows of the financial asset are assessed in their entirety,
and the asset as a whole is measured at FVTPL if any of its
cash flows do not represent payments of principal and interest.
The embedded derivative concept of IAS 39 is now included in
IFRS 9 and continues to apply to financial liabilities and hosts
not within the scope of the standard (e.g. leasing contracts,
insurance contracts, contracts for the purchase or sale of a
non-financial items).
Reclassification
For financial assets, reclassification is required between
FVTPL and amortised cost, or vice versa, if and only if the
entity's business model objective for its financial assets
changes so its previous model assessment would no longer
apply. [IFRS 9, paragraph 4.4.1]
If reclassification is appropriate, it must be done prospectively
from the reclassification date. An entity does not restate any
previously recognised gains, losses, or interest.
IFRS 9 does not allow reclassification where:

the entity has no obligation to pay amounts to the

eventual recipient unless it collects equivalent amounts on
the original asset

the entity is prohibited from selling or pledging the

original asset (other than as security to the eventual
recipient),

the entity has an obligation to remit those cash

flows without material delay
Once an entity has determined that the asset has been
transferred, it then determines whether or not it has transferred
substantially all of the risks and rewards of ownership of the
asset. If substantially all the risks and rewards have been
transferred, the asset is derecognised. If substantially all the
risks and rewards have been retained, derecognition of the
asset is precluded. [IFRS 9, paragraphs 3.2.6]
If the entity has neither retained nor transferred substantially all
of the risks and rewards of the asset, then the entity must
assess whether it has relinquished control of the asset or not. If
the entity does not control the asset then derecognition is
appropriate; however if the entity has retained control of the
asset, then the entity continues to recognise the asset to the
extent to which it has a continuing involvement in the asset.
[IFRS 9, paragraph 3.2.9]
These various derecognition steps are summarised in the
decision tree in paragraph B3.2.1.
Derecognition of financial liabilities
A financial liability should be removed from the balance sheet
when, and only when, it is extinguished, that is, when the
obligation specified in the contract is either discharged or
cancelled or expires. [IFRS 9, paragraph 3.3.1] Where there
has been an exchange between an existing borrower and
lender of debt instruments with substantially different terms, or
there has been a substantial modification of the terms of an
existing financial liability, this transaction is accounted for as an
extinguishment of the original financial liability and the
recognition of a new financial liability. A gain or loss from
extinguishment of the original financial liability is recognised in
profit or loss. [IFRS 9, paragraphs 3.3.2-3.3.3]
Derivatives
All derivatives, including those linked to unquoted equity
investments, are measured at fair value. Value changes are
recognised in profit or loss unless the entity has elected to treat
the derivative as a hedging instrument in accordance with IAS
39, in which case the requirements of IAS 39 apply.
Embedded derivatives
An embedded derivative is a component of a hybrid contract
that also includes a non-derivative host, with the effect that
some of the cash flows of the combined instrument vary in a
way similar to a stand-alone derivative. A derivative that is
attached to a financial instrument but is contractually

the 'other comprehensive income' option has been

exercised for a financial asset, or

the fair value option has been exercised in any

circumstance for a financial assets or financial liability.
Disclosures
IFRS 9 amends some of the requirements of IFRS 7 Financial
Instruments: Disclosures including added disclosures about
investments in equity instruments designated as at FVTOCI.

Objective of IAS 1
The objective of IAS 1 (2007) is to prescribe the basis for
presentation of general purpose financial statements, to ensure
comparability both with the entity's financial statements of
previous periods and with the financial statements of other
entities. IAS 1 sets out the overall requirements for the
presentation of financial statements, guidelines for their
structure and minimum requirements for their content. [IAS 1.1]
Standards for recognising, measuring, and disclosing specific
transactions are addressed in other Standards and
Interpretations. [IAS 1.3]
Scope
Applies to all general purpose financial statements based on
International Financial Reporting Standards. [IAS 1.2]
General purpose financial statements are those intended to
serve users who are not in a position to require financial
reports tailored to their particular information needs. [IAS 1.7]
Objective of financial statements
The objective of general purpose financial statements is to
provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a
wide range of users in making economic decisions. To meet
that objective, financial statements provide information about
an entity's: [IAS 1.9]
o

assets

liabilities

equity

income and expenses, including gains and losses

contributions by and distributions to owners

cash flows
That information, along with other information in the notes,
assists users of financial statements in predicting the entity's
future cash flows and, in particular, their timing and certainty.
Components of financial statements
A complete set of financial statements should include: [IAS
1.10]

a statement of financial position (balance sheet) at

the end of the period

a statement of comprehensive income for the

When an entity applies an accounting policy retrospectively or

makes a retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial
statements, it must also present a statement of financial
position (balance sheet) as at the beginning of the earliest
comparative period.
An entity may use titles for the statements other than those
stated above.
Reports that are presented outside of the financial statements
including financial reviews by management, environmental
reports, and value added statements are outside the scope
of IFRSs. [IAS 1.14]
Fair presentation and compliance with IFRSs
The financial statements must "present fairly" the financial
position, financial performance and cash flows of an entity. Fair
presentation requires the faithful representation of the effects
of transactions, other events, and conditions in accordance
with the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the Framework. The
application of IFRSs, with additional disclosure when
necessary, is presumed to result in financial statements that
achieve a fair presentation. [IAS 1.15]
IAS 1 requires that an entity whose financial statements
comply with IFRSs make an explicit and unreserved statement
of such compliance in the notes. Financial statements shall not
be described as complying with IFRSs unless they comply with
all the requirements of IFRSs (including Interpretations). [IAS
1.16]
Inappropriate accounting policies are not rectified either by
disclosure of the accounting policies used or by notes or
explanatory material. [IAS 1.16]
IAS 1 acknowledges that, in extremely rare circumstances,
management may conclude that compliance with an IFRS
requirement would be so misleading that it would conflict with
the objective of financial statements set out in the Framework.
In such a case, the entity is required to depart from the IFRS
requirement, with detailed disclosure of the nature, reasons,
and impact of the departure. [IAS 1.19-20]
Going concern
An entity preparing IFRS financial statements is presumed to
be a going concern. If management has significant concerns
about the entity's ability to continue as a going concern, the
uncertainties must be disclosed. If management concludes that
the entity is not a going concern, the financial statements
should not be prepared on a going concern basis, in which
case IAS 1 requires a series of disclosures. [IAS 1.25]

period (or an income statement and a statement of

comprehensive income)
o

a statement of changes in equity for the period

a statement of cash flows for the period

notes, comprising a summary of accounting

policies and other explanatory notes

Accrual basis of accounting

IAS 1 requires that an entity prepare its financial statements,
except for cash flow information, using the accrual basis of
accounting. [IAS 1.27]
Consistency of presentation

The presentation and classification of items in the financial

statements shall be retained from one period to the next unless
a change is justified either by a change in circumstances or a
requirement of a new IFRS. [IAS 1.45]

Current assets are cash; cash equivalent; assets held for

collection, sale, or consumption within the entity's normal
operating cycle; or assets held for trading within the next 12
months. All other assets are non-current. [IAS 1.66]

Materiality and aggregation

Current liabilities are those expected to be settled within the

entity's normal operating cycle or due within 12 months, or
those held for trading, or those for which the entity does not
have an unconditional right to defer payment beyond 12
months. Other liabilities are non-current. [IAS 1.69]

Each material class of similar items must be presented

separately in the financial statements. Dissimilar items may be
aggregated only if the are individually immaterial. [IAS 1.29]
Offsetting
Assets and liabilities, and income and expenses, may not be
offset unless required or permitted by an IFRS. [IAS 1.32]
Comparative information
IAS 1 requires that comparative information shall be disclosed
in respect of the previous period for all amounts reported in the
financial statements, both face of financial statements and
notes, unless another Standard requires otherwise. [IAS 1.38]
If comparative amounts are changed or reclassified, various
disclosures are required. [IAS 1.41]
Structure and content of financial statements in general

When a long-term debt is expected to be refinanced under an

existing loan facility and the entity has the discretion the debt is
classified as non-current, even if due within 12 months. [IAS
1.73]
If a liability has become payable on demand because an entity
has breached an undertaking under a long-term loan
agreement on or before the reporting date, the liability is
current, even if the lender has agreed, after the reporting date
and before the authorisation of the financial statements for
issue, not to demand payment as a consequence of the
breach. [IAS 1.74] However, the liability is classified as noncurrent if the lender agreed by the reporting date to provide a
period of grace ending at least 12 months after the end of the
reporting period, within which the entity can rectify the breach
and during which the lender cannot demand immediate
repayment. [IAS 1.75]

Clearly identify: [IAS 1.50]

Minimum items on the face of the statement of financial
position [IAS 1.54]

the financial statements

the reporting enterprise

(a) property, plant and equipment

whether the statements are for the enterprise or for

(b) investment property

a group
o

the date or period covered

the presentation currency

the level of precision (thousands, millions, etc.)

Reporting period
There is a presumption that financial statements will be
prepared at least annually. If the annual reporting period
changes and financial statements are prepared for a different
period, the entity must disclose the reason for the change and
a warning about problems of comparability. [IAS 1.36]
Statement of Financial Position (Balance Sheet)
An entity must normally present a classified statement of
financial position, separating current and non-current assets
and liabilities. Only if a presentation based on liquidity provides
information that is reliable and more relevant may the
current/non-current split be omitted. [IAS 1.60] In either case, if
an asset (liability) category combines amounts that will be
received (settled) after 12 months with assets (liabilities) that
will be received (settled) within 12 months, note disclosure is
required that separates the longer-term amounts from the 12month amounts. [IAS 1.61]

(c) intangible assets

(d)

financial assets (excluding amounts shown under (e), (h),

and (i))

(e) investments accounted for using the equity method

(f) biological assets
(g) inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) assets held for sale
(k) trade and other payables
(l) provisions
(m financial liabilities (excluding amounts shown under (k) and
) (l))
(n) liabilities and assets for current tax, as defined in IAS 12
(o)

deferred tax liabilities and deferred tax assets, as defined

in IAS 12

(p) liabilities included in disposal groups

(q) non-controlling interests, presented within equity and

(r)

issued capital and reserves attributable to owners of the

parent

gains and losses arising from translating the

financial statements of a foreign operation (IAS 21)

gains and losses on remeasuring available-for-sale

financial assets (IAS 39)

Additional line items may be needed to fairly present the

entity's financial position. [IAS 1.54]

the effective portion of gains and losses on

hedging instruments in a cash flow hedge (IAS 39).

IAS 1 does not prescribe the format of the balance sheet.

Assets can be presented current then non-current, or vice
versa, and liabilities and equity can be presented current then
non-current then equity, or vice versa. A net asset presentation
(assets minus liabilities) is allowed. The long-term financing
approach used in UK and elsewhere fixed assets + current
assets - short term payables = long-term debt plus equity is
also acceptable.

An entity has a choice of presenting:

o

a single statement of comprehensive income or

two statements:
an income statement displaying

components of profit or loss and

Regarding issued share capital and reserves, the following
disclosures are required: [IAS 1.79]

a statement of comprehensive income

that begins with profit or loss (bottom line of the income

o

statement) and displays components of other

numbers of shares authorised, issued and fully

comprehensive income [IAS 1.81]

paid, and issued but not fully paid

o

par value

reconciliation of shares outstanding at the

beginning and the end of the period

description of rights, preferences, and restrictions

treasury shares, including shares held by

subsidiaries and associates

shares reserved for issuance under options and

contracts

a description of the nature and purpose of each

Minimum items on the face of the statement of comprehensive

income should include: [IAS 1.82]
o

revenue

finance costs

share of the profit or loss of associates and joint

ventures accounted for using the equity method

tax expense

a single amount comprising the total of (i) the posttax profit or loss of discontinued operations and (ii) the

reserve within equity

post-tax gain or loss recognised on the disposal of the

assets or disposal group(s) constituting the discontinued

Statement of Comprehensive Income

Comprehensive income for a period includes profit or loss for
that period plus other comprehensive income recognised in
that period. As a result of the 2003 revision to IAS 1, the
Standard is now using 'profit or loss' rather than 'net profit or
loss' as the descriptive term for the bottom line of the income
statement.
All items of income and expense recognised in a period must
be included in profit or loss unless a Standard or an
Interpretation requires otherwise. [IAS 1.88] Some IFRSs
require or permit that some components to be excluded from
profit or loss and instead to be included in other
comprehensive income. [IAS 1.89]

operation
o

profit or loss

each component of other comprehensive income

classified by nature

share of the other comprehensive income of

associates and joint ventures accounted for using the
equity method

total comprehensive income

The following items must also be disclosed in the statement of
comprehensive income as allocations for the period: [IAS 1.83]

The components of other comprehensive income include:

o
o

changes in revaluation surplus (IAS 16 and IAS 38)

actuarial gains and losses on defined benefit plans

recognised in accordance with IAS 19

profit or loss for the period attributable to noncontrolling interests and owners of the parent

total comprehensive income attributable to noncontrolling interests and owners of the parent

Additional line items may be needed to fairly present the

entity's results of operations. [IAS 1.85]

separately contributions by and distributions to owners

and changes in ownership interests in subsidiaries that

No items may be presented in the statement of comprehensive

income (or in the income statement, if separately presented) or
in the notes as 'extraordinary items'. [IAS 1.87]

do not result in a loss of control

The following amounts may also be presented on the face of
the statement of changes in equity, or they may be presented
in the notes: [IAS 1.107]

Certain items must be disclosed separately either in the

statement of comprehensive income or in the notes, if material,
including: [IAS 1.98]
o

write-downs of inventories to net realisable value or

and
o

restructurings of the activities of an entity and

disposals of items of property, plant and equipment

disposals of investments

discontinuing operations

litigation settlements

other reversals of provisions

Expenses recognised in profit or loss should be analysed
either by nature (raw materials, staffing costs, depreciation,
etc.) or by function (cost of sales, selling, administrative, etc).
[IAS 1.99] If an entity categorises by function, then additional
information on the nature of expenses at a minimum
depreciation, amortisation and employee benefits expense
must be disclosed. [IAS 1.104]

The notes must: [IAS 1.112]

o

policies used
o

understanding of any of them

Notes should be cross-referenced from the face of the financial
statements to the relevant note. [IAS 1.113]
IAS 1.114 suggests that the notes should normally be
presented in the following order:
o

a statement of compliance with IFRSs

a summary of significant accounting policies

applied, including: [IAS 1.117]

used in preparing the financial statements

are relevant to an understanding of the financial

statements
o

statement of comprehensive income (and income

statement, if presented), statement of changes in equity

reconciliations between the carrying amounts at

and statement of cash flows, in the order in which each

the beginning and the end of the period for each

statement and each line item is presented

component of equity, separately disclosing:

profit or loss

each item of other comprehensive

income

supporting information for items presented on the

face of the statement of financial position (balance sheet),

the effects of retrospective application, when

the other accounting policies used that

applicable, for each component

o

the measurement basis (or bases)

showing separately amounts attributable to owners of the

provide additional information that is not presented

elsewhere in the financial statements but is relevant to an

total comprehensive income for the period,

parent and to non-controlling interests

disclose any information required by IFRSs that is

not presented elsewhere in the financial statements and

Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in
equity as a separate component of the financial statements.
The statement must show: [IAS 1.106]

present information about the basis of preparation

of the financial statements and the specific accounting

Statement of Cash Flows

Rather than setting out separate standards for presenting the
cash flow statement, IAS 1.111 refers to IAS 7 Statement of
Cash Flows

the related amount per share

Notes to the Financial Statements

reversals of any provisions for the costs of restructuring

o

amount of dividends recognised as distributions,

of property, plant and equipment to recoverable amount,

as well as reversals of such write-downs

transactions with owners, showing

o
o

other disclosures, including:

contingent liabilities (see IAS 37) and
unrecognised contractual commitments

Other disclosures

non-financial disclosures, such as the

entity's financial risk management objectives and

Disclosures about dividends

policies (see IFRS 7)

In addition to the distributions information in the statement of

changes in equity (see above), the following must be disclosed
in the notes: [IAS 1.137] " the amount of dividends proposed or
declared before the financial statements were authorised for
issue but not recognised as a distribution to owners during the
period, and the related amount per share and " the amount of
any cumulative preference dividends not recognised.

Disclosure of judgements. New in the 2003 revision to IAS 1,

an entity must disclose, in the summary of significant
accounting policies or other notes, the judgements, apart from
those involving estimations, that management has made in the
process of applying the entity's accounting policies that have
the most significant effect on the amounts recognised in the
financial statements. [IAS 1.122]

Capital disclosures

Examples cited in IAS 1.123 include management's

judgements in determining:
o

An entity should disclose information about its objectives,

policies and processes for managing capital. [IAS 1.134] To
comply with this, the disclosures include: [IAS 1.135]

whether financial assets are held-to-maturity

investments

when substantially all the significant risks and

policies and processes for managing capital, including>

rewards of ownership of financial assets and lease assets

are transferred to other entities
o

whether, in substance, particular sales of goods

description of capital it manages

nature of external capital requirements,

if any

are financing arrangements and therefore do not give rise

to revenue; and
o

whether the substance of the relationship between

how it is meeting its objectives

quantitative data about what the entity regards as

the entity and a special purpose entity indicates control

Disclosure of key sources of estimation uncertainty. Also new
in the 2003 revision to IAS 1, an entity must disclose, in the
notes, information about the key assumptions concerning the
future, and other key sources of estimation uncertainty at the
end of the reporting period, that have a significant risk of
causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year. [IAS 1.125]
These disclosures do not involve disclosing budgets or
forecasts. [IAS 1.130]

capital
o

changes from one period to another

whether the entity has complied with any external

capital requirements and

domicile and legal form of the entity

country of incorporation

address of registered office or principal place of

if it has not complied, the consequences of such

non-compliance.
Disclosures about puttable financial instruments
IAS 1.136A requires the following additional disclosures if an
entity has a puttable instrument that is classified as an equity
instrument:

The following other note disclosures are required by IAS 1.126

if not disclosed elsewhere in information published with the
financial statements:
o

qualitative information about the entity's objectives,

summary quantitative data about the amount

classified as equity

the entity's objectives, policies and processes for

managing its obligation to repurchase or redeem the

business

instruments when required to do so by the instrument

o

description of the entity's operations and principal

holders, including any changes from the previous period

activities
o
o

if it is part of a group, the name of its parent and

repurchase of that class of financial instruments and

the ultimate parent of the group

o
o

if it is a limited life entity, information regarding the

length of the life

the expected cash outflow on redemption or

information about how the expected cash outflow

on redemption or repurchase was determined.

Objective
The objective of IAS 37 is to ensure that appropriate
recognition criteria and measurement bases are applied to
provisions, contingent liabilities and contingent assets and that
sufficient information is disclosed in the notes to the financial
statements to enable users to understand their nature, timing
and amount. The key principle established by the Standard is
that a provision should be recognised only when there is a
liability i.e. a present obligation resulting from past events. The
Standard thus aims to ensure that only genuine obligations are
dealt with in the financial statements planned future
expenditure, even where authorised by the board of directors
or equivalent governing body, is excluded from recognition.
Scope
IAS 37 excludes obligations and contingencies arising from:
[IAS 37.1-6]
o

financial instruments that are in the scope

of IAS 39 Financial Instruments: Recognition and
Measurement (or IFRS 9 Financial Instruments)

non-onerous executory contracts

insurance contracts (see IFRS 4 Insurance

Contracts), but IAS 37 does apply to other provisions,
contingent liabilities and contingent assets of an insurer

items covered by another IFRS. For example, IAS

11 Construction Contracts applies to obligations arising
under such contracts; IAS 12 Income Taxes applies to
obligations for current or deferred income taxes; IAS
17 Leases applies to lease obligations; and IAS

In reaching its best estimate, the entity should take into

account the risks and uncertainties that surround the
underlying events. [IAS 37.42]

19 Employee Benefits applies to pension and other

employee benefit obligations; and .

If some or all of the expenditure required to settle a provision is

expected to be reimbursed by another party, the
reimbursement should be recognised as a separate asset, and
not as a reduction of the required provision, when, and only
when, it is virtually certain that reimbursement will be received
if the entity settles the obligation. The amount recognised
should not exceed the amount of the provision. [IAS 37.53]

Key definitions [IAS 37.10]

Provision: a liability of uncertain timing or amount.
Liability:
o
present obligation as a result of past events
o
settlement is expected to result in an outflow of resources
(payment)
Contingent liability:
a possible obligation depending on whether some
uncertain future event occurs, or
o
a present obligation but payment is not probable or the
amount cannot be measured reliably
Contingent asset:
o

o
o

a possible asset that arises from past events, and

whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.
Recognition of a provision
An entity must recognise a provision if, and only if: [IAS 37.14]

a present obligation (legal or constructive) has

arisen as a result of a past event (the obligating event),

payment is probable ('more likely than not'), and

the amount can be estimated reliably.

An obligating event is an event that creates a legal or
constructive obligation and, therefore, results in an entity
having no realistic alternative but to settle the obligation. [IAS
37.10]
A constructive obligation arises if past practice creates a valid
expectation on the part of a third party, for example, a retail
store that has a long-standing policy of allowing customers to
return merchandise within, say, a 30-day period. [IAS 37.10]

In measuring a provision consider future events as follows:

o
o
o

forecast reasonable changes in applying existing

technology [IAS 37.49]
ignore possible gains on sale of assets [IAS 37.51]
consider changes in legislation only if virtually
certain to be enacted [IAS 37.50]
Remeasurement of provisions [IAS 37.59]

Review and adjust provisions at each balance

sheet date

If an outflow no longer probable, provision is

reversed.
Some examples of provisions
Circumstance

Recognise a provision?

Restructuring by
sale of an
operation

Only when the entity is committed to a

sale, i.e. there is a binding sale
agreement [IAS 37.78]

Restructuring by
closure or
reorganisation

Only when a detailed form plan is in

place and the entity has started to
implement the plan, or announced its
main features to those affected. A
Board decision is insufficient [IAS
37.72, Appendix C, Examples 5A & 5B]

Warranty

When an obligating event occurs (sale

of product with a warranty and
probable warranty claims will be made)
[Appendix C, Example 1]

Land
contamination

A provision is recognised as
contamination occurs for any legal
obligations of clean up, or for
constructive obligations if the
company's published policy is to clean
up even if there is no legal requirement
to do so (past event is the
contamination and public expectation
created by the company's policy)
[Appendix C, Examples 2B]

Customer
refunds

Recognise a provision if the entity's

established policy is to give refunds
(past event is the sale of the product
together with the customer's
expectation, at time of purchase, that a
refund would be available) [Appendix
C, Example 4]

Offshore oil rig

must be
removed and

Recognise a provision for removal

costs arising from the construction of
the the oil rig as it is constructed, and

A possible obligation (a contingent liability) is disclosed but not

accrued. However, disclosure is not required if payment is
remote. [IAS 37.86]
In rare cases, for example in a lawsuit, it may not be clear
whether an entity has a present obligation. In those cases, a
past event is deemed to give rise to a present obligation if,
taking account of all available evidence, it is more likely than
not that a present obligation exists at the balance sheet date. A
provision should be recognised for that present obligation if the
other recognition criteria described above are met. If it is more
likely than not that no present obligation exists, the entity
should disclose a contingent liability, unless the possibility of
an outflow of resources is remote. [IAS 37.15]
Measurement of provisions
The amount recognised as a provision should be the best
estimate of the expenditure required to settle the present
obligation at the balance sheet date, that is, the amount that an
entity would rationally pay to settle the obligation at the
balance sheet date or to transfer it to a third party. [IAS 37.36]
This means:
o

Provisions for one-off events (restructuring,

environmental clean-up, settlement of a lawsuit) are
measured at the most likely amount. [IAS 37.40]

Provisions for large populations of events

(warranties, customer refunds) are measured at a
probability-weighted expected value. [IAS 37.39]

Both measurements are at discounted present

value using a pre-tax discount rate that reflects the
current market assessments of the time value of money
and the risks specific to the liability. [IAS 37.45 and 37.47]

sea bed restored

Abandoned
leasehold, four
years to run, no
re-letting
possible

A provision is recognised for the

unavoidable lease payments
[Appendix C, Example 8]

CPA firm must

staff training for
recent changes
in tax law

No provision is recognised (there is no

obligation to provide the training,
recognise a liability if and when the
retraining occurs) [Appendix C,
Example 7]

Major overhaul
or repairs

No provision is recognised (no

obligation) [Appendix C, Example 11]

Onerous (lossmaking) contract

Recognise a provision [IAS 37.66]

Future operating
losses

closure of business locations

changes in management structure

fundamental reorganisations.

What is the debit entry?

When a provision (liability) is recognised, the debit entry for a
provision is not always an expense. Sometimes the provision
may form part of the cost of the asset. Examples: included in
the cost of inventories, or an obligation for environmental
cleanup when a new mine is opened or an offshore oil rig is
installed. [IAS 37.8]
Use of provisions
Provisions should only be used for the purpose for which they
were originally recognised. They should be reviewed at each
balance sheet date and adjusted to reflect the current best
estimate. If it is no longer probable that an outflow of resources
will be required to settle the obligation, the provision should be
reversed. [IAS 37.61]
Contingent liabilities
Since there is common ground as regards liabilities that are
uncertain, IAS 37 also deals with contingencies. It requires that
entities should not recognise contingent liabilities but should
disclose them, unless the possibility of an outflow of economic
resources is remote. [IAS 37.86]
Contingent assets
Contingent assets should not be recognised but should be
disclosed where an inflow of economic benefits is probable.
When the realisation of income is virtually certain, then the
related asset is not a contingent asset and its recognition is
appropriate. [IAS 37.31-35]

No provision is recognised (no liability)

[IAS 37.63]

Restructurings
A restructuring is: [IAS 37.70]
o
sale or termination of a line of business

Restructuring provisions should include only direct

expenditures necessarily entailed by the restructuring, not
costs that associated with the ongoing activities of the entity.
[IAS 37.80]

add to the cost of the asset.

Obligations arising from the production
of oil are recognised as the production
occurs [Appendix C, Example 3]

Restructuring provisions should be recognised as follows: [IAS

37.72]
Sale of operation: recognise a provision only after
a binding sale agreement [IAS 37.78]
Closure or reorganisation: recognise a provision
only after a detailed formal plan is adopted and has
started being implemented, or announced to those
affected. A board decision of itself is insufficient.
Future operating losses: provisions are not
recognised for future operating losses, even in a
restructuring
Restructuring provision on
acquisition: recognise a provision only if there is an
obligation at acquisition date [IFRS 3.11]

Disclosures
Reconciliation for each class of provision: [IAS 37.84]
o
opening balance
o

additions

used (amounts charged against the provision)

unused amounts reversed

unwinding of the discount, or changes in discount

o
rate
o

closing balance

A prior year reconciliation is not required. [IAS 37.84]

For each class of provision, a brief description of: [IAS 37.85]
o
nature
o

timing

uncertainties

assumptions

reimbursement, if any