Contingent Liabilities

If recoverable amount is fair value less costs to sell, the basis used to determine fair value less costs to sell (such as whether fair value was determined by reference to an active market). Whether the recoverable amount of the asset (cash-generating unit) is its fair value less costs to sell or its value in use. The events and circumstances that led to the recognition or reversal of the impairment loss. Market interest rates or other market rates of return on investments have decreased during the period, and those decreases are likely to affect the discount rate used in calculating the asset’s value in use and increase the asset’s recoverable amount materially. Does not include the carrying amount of any recognised liability, unless the recoverable amount of the cash-generating unit cannot be determined without consideration of this liability. Cash-generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified.

Such a contract is not an insurance contract even if the holder uses the contract to mitigate an underlying risk exposure. Conversely, the definition of an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment. This contractual precondition does not require the insurer to investigate whether the event actually https://www.bookstime.com/articles/contingent-liabilities caused an adverse effect, but permits the insurer to deny payment if it is not satisfied that the event caused an adverse effect. Furthermore, that requirement also applies if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).

Company

Projections of cash outflows include those for the day-to-day servicing of the asset as well as future overheads that can be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset. In using information from financial budgets/forecasts, an entity considers whether the information reflects reasonable and supportable assumptions and represents management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. Base cash flow projections on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable amount calculation, the likelihood that a current recoverable amount determination would be less than the asset’s carrying amount is remote. The decrease in recoverable amount is unlikely to result in a material impairment loss. If the discount rate used in calculating the asset’s value in use is unlikely to be affected by the increase in these market rates.

A unit-linking feature is a contractual term that requires payments denominated in units of an internal or external investment fund. Some fixed-fee service contracts in which the level of service depends on an uncertain event meet the definition of an insurance contract in this IFRS but are not regulated as insurance contracts in some countries. One example is a maintenance contract in which the service provider agrees to repair specified equipment after a malfunction. The fixed service fee is based on the expected number of malfunctions, but it is uncertain whether a particular machine will break down. The malfunction of the equipment adversely affects its owner and the contract compensates the owner (in kind, rather than cash).

Free Accounting Courses

An example is a reinsurance contract that covers the direct insurer against adverse development of claims already reported by policyholders. In such contracts, the insured event is the discovery of the ultimate cost https://www.bookstime.com/ of those claims. If it is impracticable to apply a particular requirement of paragraphs to comparative information that relates to annual periods beginning before 1 January 2005, an entity shall disclose that fact.

In the case of a finance lease, the underlying asset may be either tangible or intangible. After initial recognition, a lessee accounts for an intangible asset held under a finance lease in accordance with this Standard. Rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights are excluded from the scope of IAS 17 and are within the scope of this Standard. The amendment in this appendix shall be applied when an entity applies IAS 16 Property, Plant and Equipment (as revised in 2003). It is superseded when IAS 36 Impairment of Assets (as revised in 2004) becomes effective.

Contingent Liability: What Is It, and What Are Some Examples?

Since the company’s inventory of supply parts (an asset) went down by $2,800, the reduction is reflected with a credit entry to repair parts inventory. While a contingency may be positive or negative, we only focus on outcomes that may produce a liability for the company (negative outcome), since these might lead to adjustments in the financial statements in certain cases. Positive contingencies do not require or allow the same types of adjustments to the company’s financial statements as do negative contingencies, since accounting standards do not permit positive contingencies to be recorded.

If an insurer’s liability adequacy test meets the minimum requirements of paragraph 16, the test is applied at the level of aggregation specified in that test. If its liability adequacy test does not meet those minimum requirements, the comparison described in paragraph 17 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. Accordingly, all references in this IFRS to insurance contracts also apply to reinsurance contracts. Expenditure incurred in the Content Development stage, to the extent that content is developed to advertise and promote an entity’s own products and services (eg digital photographs of products), shall be recognised as an expense when incurred in accordance with IAS 38.69(c). Contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date.

Overview of Changes

This requirement applies to costs incurred initially to acquire or internally generate an intangible asset and those incurred subsequently to add to, replace part of, or service it. A reversal of an impairment loss for an asset shall be recognised as income immediately in the income statement, unless the asset is carried at revalued amount under another Standard (for example, in accordance with the revaluation model in IAS 16 Property, Plant and Equipment). Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase under that other Standard. An entity normally uses a single discount rate for the estimate of an asset’s value in use.

This Standard defines recoverable amount as the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit. Operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future.

Business Operations

Therefore, when the basis used to estimate the discount rate is post-tax, that basis is adjusted to reflect a pre-tax rate. (1)  In the case of an intangible asset, the term ‘amortisation’ is generally used instead of ‘depreciation’. The amount by which the aggregate of the units’ (groups of units’) recoverable amounts exceeds the aggregate of their carrying amounts.

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