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US GAAP versus IFRS - Provisions and contingencies - EY - United States


Provisions and contingencies

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While the sources of guidance under US GAAP and IFRS differ significantly, the general recognition criteria for provisions are similar. IAS 37, Provisions, Contingent Liabilities and Contingent Assets, provides the overall guidance for recognition and measurement criteria of provisions and contingencies. While there is no equivalent single standard under US GAAP, ASC 450, Contingencies, and a number of other standards deal with specific types of provisions and contingencies (e.g., ASC 410, Asset Retirement and Environmental Obligations; ASC 420, Exit or Disposal Cost Obligations).

In addition, although nonauthoritative, the guidance in two Concept Statements in US GAAP (CON 5, Recognition and Measurement in Financial Statements of Business Enterprises, and CON 6, Elements of Financial Statements) is similar to the specific recognition criteria provided in IAS 37. Both US GAAP and IFRS require recognition of a loss based on the probability of occurrence, although the definition of probability is different under US GAAP (in which probable is interpreted as "likely") and IFRS (in which probable is interpreted as "more likely than not").

Both US GAAP and IFRS prohibit the recognition of provisions for costs associated with future operating activities. Further, both US GAAP and IFRS require disclosures about a contingent liability whose occurrence is more than remote but does not meet the recognition criteria.

Significant differences

Discounting provisionsProvisions may be discounted only when the amount of the liability and the timing of the payments are fixed or reliably determinable, or when the obligation is a fair value obligation (e.g., an asset retirement obligation under ASC 410-20). The discount rate to be used is dependent upon the nature of the provision, and may vary from that used under IFRS. However, when a provision is measured at fair value, the time value of money and the risks specific to the liability should be considered.Provisions should be recorded at the estimated amount to settle or transfer the obligation taking into consideration the time value of money. The discount rate to be used should be "a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability."
Measurement of provisions — range of possible outcomesMost likely outcome within range should be accrued. When no one outcome is more likely than the others, the minimum amount in the range of outcomes should be accrued. Best estimate of obligation should be accrued. For a large population of items being measured, such as warranty costs, best estimate is typically expected value, although midpoint in the range may also be used when any point in a continuous range is as likely as another. Best estimate for a single obligation may be the most likely outcome, although other possible outcomes should still be considered.
Restructuring costsUnder ASC 420, once management has committed to a detailed exit plan, each type of cost is examined to determine when recognized. Involuntary employee termination costs are recognized over future service period, or immediately if there is no future service required. Other exit costs are expensed when incurred.Once management has "demonstrably committed" (i.e., a legal or constructive obligation has been incurred) to a detailed exit plan, the general provisions of IAS 37 apply. Costs typically are recognized earlier than under US GAAP because IAS 37 focuses on the exit plan as a whole, rather than individual cost components of the plan.
Disclosure of contingent liabilityNo similar provision to that allowed under IFRS for reduced disclosure requirements.Reduced disclosure permitted if it would be severely prejudicial to an entity's position in a dispute with other parties.


The IASB proposed amendments to IAS 37 in 2005 and then proposed amendments to IAS 37's measurement provisions in January 2010. The IASB is reviewing the project as part of its agenda consultation process in 2012.

In July 2010, the FASB proposed amendments to the disclosure requirements of ASC 450. Certain of the proposed changes are consistent with current disclosures under IAS 37 (e.g., tabular reconciliation of accrued loss contingencies), while other proposed changes may result in further differences (e.g., disclosure of certain remote loss contingencies). The FASB planned to begin redeliberations after reviewing filings for the 2010 calendar year-end reporting cycle to determine whether efforts to increase focus on compliance with existing rules have resulted in improved disclosures about loss contingences.

The FASB has not had any formal discussions about this project since November 2010.

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