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IFRS and US GAAP, with Website: A Comprehensive Comparison by Steven E. Shamrock

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5

PROVISIONS AND CONTINGENCIES

Under IFRS, a provision is a liability of undermined timing or amount. This contrasts with an accrual or accounts payable obligation that is fixed in terms of the amount and timing needed to satisfy the obligation. The estimated accrual of goods or services received but not invoiced does not qualify for treatment as a provision. Accounts payable accruals are part of the normal estimation processes that are part of routine accounting practices.

Under IFRS, the measurement of a provision at the end of a reporting period must be the most likely amount that would be required to settle the obligation at the date of the financial statements. This is true even if the entity believes that further actions on the part of the entity or obligee(s) could potentially change the settlement amount. To determine the carrying value of the provision, an entity must choose the most likely amount in a range of scenarios, unless a number of other estimates are materially higher or lower than the likely amount, in which case the amount is adjusted to reflect the other values. Under US GAAP, the minimum in a range of estimates is recognized. Additionally, provisions are recorded if the probability of payment is more likely than not, which translates to just over 50%. The US GAAP threshold is generally higher. Following is an example of the estimation of a legal provision.

IAS 37

36 The amount recognized as a provision shall be the best estimate of the expenditure required ...

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