Disclosure of contingent liabilities and assets

Learning objectives

• Identify the disclosures required for contingent liabilities (unless the outflow is remote) and contingent assets (when the inflow is probable).L2, L3
• Draft a note on contingencies that avoids giving misleading indications of the likelihood of income arising and that states when information is impracticable to provide.L3, L4
• Assess the use of the exemption for information that could prejudice seriously the entity's position in a dispute, and the minimum disclosures that remain required.L3, L4

Normative references

• IAS 37 §86Unless the possibility of an outflow is remote, the entity discloses for each class of contingent liability a brief description of its nature and, where practicable, an estimate of its financial effect (measured under paras. 36 to 52), an indication of the uncertainties relating to the amount or timing of any outflow and the possibility of any reimbursement.
• IAS 37Where an inflow of economic benefits is probable, the entity discloses a brief description of the nature of the contingent assets at the end of the reporting period and, where practicable, an estimate of their financial effect measured using the principles set out for provisions (paras. 36 to 52).
• IAS 37Disclosure of contingent assets must avoid giving misleading indications of the likelihood of income arising.
• IAS 37 §91Where any of the information required by paras. 86 and 89 is not disclosed because it is not practicable to do so, that fact is stated.
• IAS 37In extremely rare cases, disclosure of some or all of the information required by paras. 84 to 89 could be expected to prejudice seriously the position of the entity in a dispute with other parties; the entity may then refrain from disclosing it, but discloses the general nature of the dispute, together with the fact that, and the reason why, the information has not been disclosed.

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

10 questions

• Unless the outflow is remote, the entity briefly describes the nature of each class of contingent liability and, where practicable, gives an estimate of its financial effect, an indication of the uncertainties and the possibility of any reimbursement.L2
• From when must Ermolane describe a contingent asset in its notes?L2
• For a contingent liability whose outflow is not remote, what information must Floravel disclose?L2
• Where information required about a contingent liability or a contingent asset is not disclosed because it is not practicable to do so, that fact is stated.L3
• In the note describing probable compensation it is claiming from a former supplier, Gramalis wishes to write "income of 2,000,000 secured for 20X6". Which requirement does this wording disregard?L3
• Hennevane is in dispute with a competitor; publishing its estimate of the financial effect could, in this extremely rare case, seriously prejudice its position in the ongoing negotiation. What may it do?L3
• Issorane is reviewing three unrecognised files: (1) a claim against it, outflow considered remote; (2) a claim against it, outflow possible; (3) an action it has brought, gain considered merely possible. What does it disclose?L3
• Jonzelle is being sued by a former partner for 12,000,000; an adverse ruling is possible but not probable. Its lawyers fear that a published estimate would weaken its position in the settlement negotiations under way. Management proposes writing nothing. Write a memo on the disclosure required, distinguishing rule, data and judgement.L4
• Kaysmorel is claiming 3,500,000 from an insurer for a loss event; its lawyers consider it probable, though not certain, that compensation will be obtained, but no reliable estimate of its amount is practicable at the reporting date. The communications department proposes the sentence: "significant exceptional income is expected in 20X6". Write the note on this contingent asset and comment on the proposed sentence.L4
• Lectorane faces an emerging class action whose outflow is possible; the number of claimants and the basis of the claims make any estimate of the financial effect impracticable at the reporting date. Which note complies?L4