Answered: IAS 37, Provisions, Contingent…

Contemporary Auditing

11th Edition

ISBN:9781337650380

Author:KNAPP

Publisher:KNAPP

Chapter1: Comprehensive Cases

Section1.2: Lehman Brothers Holdings, Inc.

Problem 2Q

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IAS 37, Provisions, Contingent Liabilities and Contingent Assets was issued in 1998. The
Standard sets out the principles of accounting for these items and clarifies when
provisions should and should not be made. Prior to its issue, the inappropriate use of
provisions had been an area where companies had been accused of manipulating the
financial statements and of creative accounting.
Required:
a) Describe the nature of provisions and the accounting requirements for them
contained in IAS 37.
b) Explain why there is a need for an accounting standard in this area. Illustrate
your answer with three practical examples of how the Standard addresses
controversial issues.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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