Financial Reporting Analysis: IAS 37 and the Current Liabilities

This report analyzes financial reporting, specifically focusing on the application of IAS 37 and its implications for provisions and current liabilities. The report begins by defining a provision and differentiating it from a standard liability, highlighting the uncertainty surrounding the timing or amount of the obligation. It then explores the criteria for recognizing a provision under IAS 37, emphasizing the need for a present obligation, the likelihood of an outflow of resources, and the ability to make a reliable estimate of the obligation. The report applies these concepts to a scenario involving a company's legal fees, assessing the accuracy of a $28 million provision in light of potential outcomes and probabilities, and the time value of money. It concludes that the $28 million provision might be too low and should be adjusted. The report provides a comprehensive overview of the accounting principles and the impact of provisions on financial statements.

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Financial Reporting
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FINANCIAL REPORTING 2
Financial Reporting
IAS 37 finds that under the current liabilities in Dynamics statement of financial position
is a provision of $28 million. A provision is a liability. However, the difference between a
provision and a liability is that one is either not sure how much to pay or when to pay it. (Collier
2015, p.53) However, there is certainty that there is high chance that one needs to pay. Under the
recognition of a provision, IAS37 describes a provision as " a liability of uncertain timing or
amount " and expresses that a provision ought to be perceived when the greater part of the
accompanying conditions are fulfilled: the element has a present obligation (constructive or
legal) because of a past event. It is plausible that an outpouring of assets exemplifying monetary
advantages will be required to settle the obligation. It is a reliable estimate can be made of the
measure of the obligation.
In this case, the $28m provision is a present obligation, and it’s a legal claim since the
law requires it. One is dealing with a single item which is the legal fees. There is a high chance
for cash outflow since the Dynamics’ lawyer believes that the customer has a strong case. The
reliable estimate is the reasonable amount to settle the obligation. The best estimate means the
most reasonable amount and the most likely expected outcome. There need to be considerations
of the time value of money, if the payment period is a long time, then the amount needs to be
converted to the present value. (Kashyap 2014). A key idea of Time Value of Money is that a
solitary whole of money or a progression of equivalent, uniformly divided installments or
receipts guaranteed later on can be changed over to an equal value today. (Xingyun 2015). On
the other hand, you can decide the value to which a single total or a progression of future
installments will develop at some future date.The reliable estimate is an evaluation of damages
payable using the probability. First, one needs to calculate the expected value. I believe that the

FINANCIAL REPORTING 3
$28m has been correctly recorded in the statement of financial position as a current liability. This
is because it should be credited on the balance sheet as it is owed money which is a payable.
In this case, if $32m (45%) is selected, then the $28m provision is too low since there
will be a debit on the expense account of $4m and a credit on the provision account for the same
amount. As the obligation measured is single and there are several possible outcomes, the best
estimate of the mandatory expense is the most likely outcome cost. Therefore, in this scenario,
the expense should be $32m with 45% probability of occurrence as advised by the lawyers hence
the $28m estimate is too low and requires an adjustment.

FINANCIAL REPORTING 4
Bibliography
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Erdener Acar, E. and Ozkan, S., 2016. Corporate Governance and Provisions Under IAS 37.
Kashyap, A., 2014. Capital Allocating Decisions: Time Value of Money. Asian Journal of
Management, 5(1), pp.106-110.
Xingyun, P.E.N.G., 2015. Time Value of Money. World Scientific Book Chapters, pp.49-70.