Provisions and Contingencies Similarities While the sources of guidance under U.S. GAAP and IFRS differ significantly, the general recognition criteria for provisions are similar. For example, IAS 7 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 U.S. GAAP, FAS 5 Accounting for Contingencies and a number of other statements deal with specific types of provisions and contingencies (for example, FAS 14 for asset retirement obligations and FAS 14 for exit and disposal activities). Further, the guidance provided in two Concept Statements in U.S. GAAP (CON 5 Recognition and Measurement in Financial Statements of Business Enterprises and CON Elements of Financial Statements) is similar to the specific recognition criteria provided in IAS 7. Both GAAPs require recognition of a loss based on the probability of occurrence, although the definition of probability is different under U.S. GAAP (where probable is interpreted as “likely”) and IFRS (where probable is interpreted as “more likely than not”). Both U.S. GAAP and IFRS prohibit the recognition of provisions for costs associated with future operating activities. Further, both GAAPs require information about a contingent liability, whose occurrence is more than remote but did not meet the recognition criteria, to be disclosed in the notes to the financial statements. Significant Differences Discounting provisions Measurement of provisions — range of possible outcomes U.S. GAAPIFRS Provisions 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 (for example, an asset retirement obligation under FAS 143). Discount rate to be used is dependent upon the nature of the provision, and may vary from that used under IFRS. Most 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. 28 u.s. gaaP v. iFrs: t h E Basics Provisions should be recorded at the estimated amount to settle or transfer the obligation taking into consideration the time value of money. 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.” 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 mid-point 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.
U.S. GAAPIFRS Restructuring Costs Per FAS 146, 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 none. Other exit costs are expensed when incurred. Disclosure of contingent liability Convergence No similar provision to that allowed under IFRS for reduced disclosure requirements. Once management has “demonstrably committed” (that is a legal or constructive obligation) to a detailed exit plan, the general provisions of IAS 37 apply. Costs typically recognized earlier than under U.S. GAAP because IAS 37 focuses on exit plan as a whole, rather than individual cost components of the plan. Reduced disclosure permitted if it would be severely prejudicial to an entity’s position in a dispute with other party to a contingent liability. Both the FASB and the IASB have current agenda items dealing with this topic. An exposure draft proposing amendments to IAS 7 was issued in 2005, with a final standard expected no earlier than the first half of 2009. 29