Another example could be the voluntary pension plan (VRS), which is usually advertised in public and in the media, etc., and then it goes through approval processes and once an agreement is reached, only one provision is created. However, depending on the applicability of the concept of duty in fact, a company may create such a VRS provision (as in our example) on the day it is announced/communicated to the general public. A contingent liability (contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is made remotely. [IAS 37.86] Contingent liabilities are potential liabilities whose existence is confirmed by uncertain future events that are not entirely under the Company`s control. An example is litigation against the company when it is not certain that the company has committed wrongdoing and when it is unlikely that a settlement will be necessary. An entity recognises an obligation as a contingent liability if it considers that the obligation is less likely to result in an outflow of economic benefits. A bond that is more likely to result in an outflow of economic benefits is also presented as a contingent liability if the entity cannot estimate the amount with reasonable reliability. In rare cases, such as litigation, it may not be clear whether a company has a current obligation. In such cases, a past event shall be deemed to give rise to a current obligation if, having regard to all available evidence, it is more likely that a current obligation exists at the balance sheet date. This obligation should be provided for if the other recognition criteria described above are met.

If it is more likely that there is no current obligation, an entity shall disclose a contingent liability, unless the possibility of an outflow of resources is low. [IAS 37.15] Contingent liabilities also include obligations that are not recognized because their amount cannot be reliably measured or because satisfaction is not likely. Contingent liabilities do not include provisions for which it is certain that the entity has a current obligation that will most likely result in an outflow of cash or other economic resources, even if the amount or timing is uncertain. Where some or all of the expenses necessary to settle a provision are to be reimbursed by another party, the repayment should be recognised as a separate asset and not as a reduction in the required provision if and only if it is reasonably certain that a refund will be obtained when the entity satisfies the obligation. The amount recorded should not exceed the amount of the provision. [IAS 37.53] The amount recognised as a provision should be the best estimate of the expenses necessary to settle the current obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. [IAS 37.36] This means that, on the negative side, the practice of addressing constructive engagements offers significant opportunities for managing profits by overvaluing liabilities. The determination of when de facto liability should be recognized and the estimation of the amount of liability require a discretionary decision.

The de facto obligation is converted into a contractual obligation when the company enters into binding contracts as part of the implementation of the system. However, the date on which the de facto obligation is established is the date on which an allowance is recognized. ABS. 10 – A de facto obligation is an obligation arising from the actions of an undertaking where: a decision-making authority (either within the board of directors or at the general meeting) decides to incur certain expenses, such as certain social benefits which have not yet been communicated to the parties (not necessarily for the same parties) for which responsibilities are exercised, do not constitute an implied obligation. Notification should be given to the parties (not necessary for the same parties) in order to create an expectation of the fulfilment of these responsibilities, in which case it is only an implied obligation. As a rule, an obligation arises from a binding contract or a legal obligation. An obligation may also arise from normal business practices, customs, and the desire to maintain good business relations or to act fairly. A provision is a liability of an uncertain time or amount. Liability may be a legal obligation or a de facto obligation.

A de facto obligation arises from the corporation`s actions by which it signalled to others that it would assume certain responsibilities and, therefore, created the expectation that it would discharge those responsibilities. Examples of provisions include: warranty obligations; legal or de facto obligations to remediate contaminated land or remediate facilities; and obligations under a retailer`s policy of making refunds to customers. If a provision (liability) is made, accounting for the debit of a provision is not always an expense. Sometimes the provision may be part of the cost of the asset. Examples: included in inventory costs or a commitment to environmental remediation when opening a new mine or offshore oil rig. [IAS 37.8] One senses this new requirement, which certainly offers a space to take more precautions on the basis of its constructive character. Management must identify these obligations at the time of transition and in the future. The process needs to be updated to capture these provisions in a timely manner and document them appropriately for audit purposes. If the aggregation of all previously proportionally consolidated assets and liabilities results in a net debt position, the entity measures whether it has legal or implied obligations relative to net debt and, if so, recognises the corresponding liabilities.

In some circumstances, a de facto obligation may become legally enforceable, making it a little clearer that it must be accounted for – but it must still meet the other criteria for recognition of liability. For example, a restructuring plan creates a de facto obligation if the plan is disclosed to the people who will be affected and the implementation period is so short that the company has no choice but to implement it. According to current practice, there is nothing called constructive engagement, but in some industries it is done on the basis of certain customs/practices to be maintained with good relations in the market. Current accounting requires a provision when an entity has a current obligation as a result of a past event and the liability is considered probable and can be reliably estimated, which is essentially nothing about actual obligations. Even if it is uncertain, it may be necessary to disclose an implied obligation as a contingent liability. A de facto obligation is an obligation to pay arising from conduct and intent and not from a contract. An implied obligation may need to be recognised as a liability in the balance sheet. A liability (financial obligation) arising from the actions of a company and the expectations of others who rely on such actions when the company has signalled to other parties its willingness to assume or fulfill certain responsibilities that would give rise to a future financial obligation (usually through a set of past practices, officially published and communicated policies, or an explanation), etc.). A de facto obligation arises from observing the actions of a company. For example, a company may have a policy to cover all defective products (by recalling those products and reimbursing affected customers). This indicates that the company is willing to take responsibility for defective products and, therefore, the market would have a legitimate expectation of a discount for any defective product actually sold by the company. If it is determined that there are no legal or implied obligations with respect to net liabilities, the corresponding liability is not recognized, with an adjustment to retained earnings at the beginning of the first period presented.

In such cases, it should be clarified that this approach was followed, together with a reference to the accumulated unrecognised share of losses incurred by the joint ventures at the beginning of the first period presented and at the date of first application of IFRS 11. The objective of IAS 37 is to ensure that appropriate recognition criteria and valuation bases are applied to provisions, contingent liabilities and contingent assets and that the notes to the financial statements contain sufficient information to enable users to understand their nature, timing and amount.