Contingent liabilities

Learning objectives

• Identify a contingent liability and its treatment: not recognised, disclosed unless the outflow is remote.L1, L2
• Calculate the part of a joint and several obligation that is provided for and the part treated as a contingent liability.L2, L3
• Reassess a contingent liability at each reporting date and recognise a provision in the period in which the outflow becomes probable.L2, L3

Normative references

• IAS 37 §27An entity does not recognise a contingent liability.
• IAS 37 §28A contingent liability is disclosed (para. 86), unless the possibility of an outflow of resources is remote.
• IAS 37 §29Where an entity is jointly and severally liable, the part of the obligation expected to be met by other parties is treated as a contingent liability; the entity recognises a provision for the part for which an outflow is probable, except in the extremely rare case where no reliable estimate can be made.
• IAS 37 §30Contingent liabilities are assessed continually; if an outflow becomes probable for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except where no reliable estimate can be made).
• IAS 37 §58An obligation for which an entity is jointly and severally liable is a contingent liability to the extent that it is expected to be settled by the other parties (cross-reference to para. 29).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

14 questions

• A contingent liability is recognised in the statement of financial position when its amount is material to the entity.L1
• Pradane faces a possible obligation; the outflow of resources is neither probable nor remote. Which treatment applies?L1
• When the possibility of an outflow of resources is remote, no disclosure is required for the contingent liability.L1
• Which statements about contingent liabilities are correct?L2
• Pradane and two other manufacturers jointly polluted a river; they are jointly and severally liable for the clean-up, estimated at {total_obligation}. The two other manufacturers are solvent and Pradane expects to bear {expected_share}% of the cost, in line with their sharing agreement. Compute the amount Pradane recognises as a provision and the amount treated as a contingent liability.L2
• A consortium formed by Sorvane and a partner has been ordered to pay {damages_awarded} to a project owner; both members are jointly and severally liable. The consortium agreement allocates {contractual_share}% of the charge to Sorvane. The partner, in financial difficulty, will probably be unable to pay a portion of its share equal to {partner_shortfall}% of the total amount, which Sorvane expects to have to pay. Compute Sorvane's provision and the amount it treats as a contingent liability.L3
• In a joint and several obligation, how does the entity treat the part expected to be met by the other parties?L2
• An item treated as a contingent liability at one reporting date keeps that treatment until it is settled, even if an outflow of resources later becomes probable.L2
• At the end of 20X4, Tesmara disclosed a customer claim as a contingent liability, the outflow then being merely possible. In October 20X5, new evidence makes an adverse ruling probable and the compensation estimable. What is the treatment at 31 December 20X5?L2
• At 31 December 20X5, Urvane discloses as a contingent liability a dispute with a carrier whose outcome is possible. In March 20X6, after the 20X5 financial statements were authorised, new testimony about facts that occurred in February 20X6 makes an adverse ruling probable; the compensation can be estimated. How is this change reflected?L3
• Vilmontane has a present obligation towards a former subcontractor, but its advisers consider a payment merely possible: the outflow is neither probable nor remote. Which treatment applies?L2
• Wendrel owns, in equal shares with two other solvent companies, a pipeline whose leak polluted neighbouring land. The {co_owners} co-owners are jointly and severally liable for the clean-up, costed at {clean_up_cost}; each expects to bear an equal share. What amount does Wendrel disclose as a contingent liability?L3
• At 31 December 20X5, Yselle reviews three files: (1) a possible obligation whose outflow is considered remote; (2) a possible obligation whose outflow is possible; (3) a file disclosed as a contingent liability in 20X4, whose outflow became probable and estimable in 20X5. Which overall treatment is correct?L3
• An entity that is jointly and severally liable for an obligation always provides for the full amount, since the creditor can claim all of it from the entity.L2