IAS 37Chapter 3Lesson 2
The present obligation and the obligating event
Step 1 of 8Learning objectives
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The first condition for a provision is the most delicate: is there, at the reporting date, a present obligation arising from a past event? In case of doubt, the entity concludes that the obligation exists if this is more likely than not, in the light of all the evidence, including expert opinions and events after the reporting period. Only obligations that exist independently of the entity's future actions are provided for; a decision creates a constructive obligation only if it has been communicated precisely to those affected; draft legislation creates an obligation only when its enactment as drafted is virtually certain.
Learning objectives
- Determine whether a present obligation exists at the reporting date using the 'more likely than not' threshold and all available evidence, including expert opinions and events after the reporting period.
- Analyse whether an obligation exists independently of the entity's future actions, and justify the absence of a provision for future operating costs.
- Assess whether a decision or statement has created a constructive obligation (precise communication, valid expectations of third parties).
- Explain when new legislation creates an obligation and when damage becomes an obligating event.