Scope, executory contracts and other standards

Learning objectives

• Identify the situations excluded from the scope of IAS 37: executory contracts that are not onerous, financial instruments within the scope of IFRS 9 and items covered by another standard (IAS 12, IFRS 16, IAS 19, IFRS 17, IFRS 3, IFRS 15).L1, L2
• Distinguish a provision within the meaning of IAS 37 from an adjustment to the carrying amount of an asset (depreciation, impairment, doubtful debts).L1, L2
• Determine whether IAS 37 applies to a contract with a customer or to a lease that has become onerous (cross-references in paras. 5(c) and 5(g)).L2

Normative references

• IAS 37All entities apply the standard to provisions, contingent liabilities and contingent assets, except those resulting from executory contracts (unless the contract is onerous) and those covered by another standard. Item (b) has been deleted.
• IAS 37The standard does not apply to financial instruments (including guarantees) that are within the scope of IFRS 9.
• IAS 37 §3Executory contracts are contracts under which neither party has performed any of its obligations, or both parties have partially performed their obligations to an equal extent. The standard applies to such contracts only if they are onerous.
• IAS 37When another standard deals with a specific type of provision, contingent liability or contingent asset, the entity applies that standard. Examples: income taxes (IAS 12); leases (IFRS 16), IAS 37 still applying to a lease that becomes onerous before its commencement date and to short-term leases and leases of low-value assets accounted for under para. 6 of IFRS 16 that have become onerous; employee benefits (IAS 19); contracts within the scope of IFRS 17; contingent consideration of an acquirer in a business combination (IFRS 3); revenue from contracts with customers (IFRS 15), IAS 37 nevertheless applying to contracts with customers that are, or have become, onerous, because IFRS 15 contains no specific requirements for them.
• IAS 37The standard defines provisions as liabilities of uncertain timing or amount. In some countries the term 'provision' is also used for items such as depreciation, impairment of assets and doubtful debts: these are adjustments to the carrying amounts of assets and are not addressed by the standard.
• IAS 37 §8Other standards specify whether expenditures are treated as assets or as expenses; IAS 37 neither prohibits nor requires capitalisation of the costs recognised when a provision is made.
• IAS 37The standard applies to provisions for restructurings, including discontinued operations; when a restructuring meets the definition of a discontinued operation, IFRS 5 may require additional disclosures.

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

20 questions

• IAS 37 seeks to ensure that appropriate measurement bases are applied not only to provisions but also to contingent liabilities and contingent assets.L1
• Which set of items does the objective of IAS 37 target?L1
• An executory contract that is not onerous is outside the scope of IAS 37.L1
• The "provision for doubtful receivables" account kept by Bramont is a provision as defined in IAS 37.L1
• Which of these situations is an executory contract as described in IAS 37?L1
• Calvérane has granted a guarantee that falls within the scope of IFRS 9. Which standard determines its accounting treatment?L1
• Which of these items fall under a standard other than IAS 37 that deals with that specific type of liability?L1
• A contract with a customer accounted for under IFRS 15 that becomes onerous falls under IAS 37 for the expected loss.L2
• Estrévia's trial balance includes an account named "provision for depreciation of machinery". How should it be classified under IAS 37?L2
• On 1 October 20X5, Falcoris signs a lease of a warehouse with a commencement date of 1 March 20X6. In December 20X5, the loss of a customer makes this contract onerous. Which standard deals with this loss at the reporting date of 31 December 20X5?L2
• Grenadel has firmly committed to buy 2,000 tonnes of wood pellets at the agreed fixed price, for delivery in 20X6; no delivery or payment has taken place at 31 December 20X5. The market price has risen slightly and the pellets will be resold at a margin. What should be concluded at the reporting date?L2
• IAS 37 requires every cost recognised when a provision is set up to be expensed.L2
• Hautvane plans to discontinue a business that meets the definition of a discontinued operation. How do IAS 37 and IFRS 5 interact for the restructuring provision?L2
• Ilmarée presents several accounts named "provision". Which of them correspond to a provision as defined in IAS 37?L2
• On acquiring Junivel, Lumaret undertakes to pay the seller an additional price if Junivel's revenue exceeds a threshold in 20X7. Under which standard does Lumaret account for this contingent additional price?L2
• Novélia measures its uncertain income tax for the year under IAS 37.L1
• Orsalis leases a storage unit for 10 months; it has elected to account for this short-term lease under paragraph 6 of IFRS 16, as an expense of the period. Following the discontinuation of a product range, the unit is empty and the contract has become onerous. Which standard deals with this situation?L2
• On 31 December 20X5, Cendral completes the construction of a telecommunications tower on public land; the permit requires it to dismantle the tower in {years} years, at an estimated cost of {decommissioning_cost}. The pre-tax rate used is {rate}%. The IAS 16 criteria for including the initial estimate of the dismantling cost in the cost of the tower are met (case data). Record the entry setting up the provision (amount rounded to the nearest unit).L2
• At the end of 20X5, Dorvalis brings into service a water treatment plant built on concession land. The concession requires the installations to be removed and the land returned in {years} years; the cost, estimated at {removal_cost}, is discounted at the pre-tax rate of {rate}%. The IAS 16 criteria for including this initial estimate in the cost of the plant are met (case data). Record the provision when it is set up (amount rounded to the nearest unit).L3
• Salvère has firmly committed to buy paper in 20X6; neither party has yet performed its obligations. The paper will be processed and resold at a positive margin. What is the treatment of the contract under IAS 37?L3