A provision is a liability of uncertain timing or amount.
We recognise a provision when:-
(a) an entity has a present legal or constructive obligation as a result of a past event;
(b) it is probable that an outflow of economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation
A constructive obligation is an obligation where the entity, through its actions, has indicated to other parties that it will accept certain responsibilities and as a result has created an expectation that it will discharge those responsibilities.
- a detailed formal plan for restructuring; and
- raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
A contingent asset is not recognised, but is disclosed when an inflow of economic benefits is probable.
FRS 37 specifies disclosures about provisions, contingent liabilities and assets.
Source – ICPAS ePublication Issue 23/2006 13 Jun 2006