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Editor's Notes

• #4: U.S. GAAP and IFRSs use different terminology to describe contingencies. Under U.S. GAAP, this terminology is related to financial statements' elements of performance (two key terms are "contingent gains" and "contingent losses"), whereas under IFRSs, the terminology used is related to financial statements' elements of financial position (the three key terms are "contingent assets," "contingent liabilities," and "provisions"). However, the two sets of terms may be applied similarly so that no difference between them arises in practice. Under U.S. GAAP, ASC 450-20 defines a contingency as an "existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur." If an estimated loss from a loss contingency meets the conditions for loss accrual in ASC 450-20-25-2, the loss contingency is accrued. Under IFRSs, IAS 37 defines (1) a "contingent asset" as "a possible asset . . . whose existence will be confirmed only by the occurrence or non-occurrence of . . . uncertain future events"; (2) a "contingent liability" as "a possible obligation . . . whose existence will be confirmed only by the occurrence or non-occurrence of . . . uncertain future events . . . or a present obligation that . . . is not recognised"; and (3) a "provision" as "a liability of uncertain timing or amount." Under U.S. GAAP, a loss contingency that has been accrued as a liability (a "provision" under IFRSs) and a loss contingency that has not been accrued (a "contingent liability" under IFRSs) are not defined separately. In addition, as noted above, the accrual for a loss contingency under ASC 450-20 could involve a valuation adjustment of a recognized asset (e.g., bad debt), whereas IAS 37 does not apply to valuation adjustments of recognized assets.
• #5: Under U.S. GAAP, one of the conditions that must be met before an entity can accrue an estimated loss from a loss contingency is that "it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements" ¡ª that is, "it must be probable that one or more future events will occur confirming the fact of the loss" (ASC 450-20-25-2(a)). Under IFRSs, one of the conditions for recognizing a provision as a liability is that "it is probable that an outflow of resources . . . will be required to settle the obligation" (paragraph 14 of IAS 37). A key difference between U.S. GAAP and IFRSs in applying the above conditions lies in the definition of "probable." Paragraph 23 of IAS 37 defines probable as "more likely than not to occur" (i.e., "the probability that the event will occur is greater than the probability that it will not"). ASC 450-20-20 defines "probable" as "likely to occur." While the assessment of these terms is subject to an entity's judgment, "likely" under U.S. GAAP typically is considered a much higher threshold (i.e., approximately 80 percent) than "more likely than not" under IFRSs (i.e., greater than 50 percent). Therefore, more contingencies may qualify for recognition as liabilities under IFRSs than under U.S. GAAP.
• #6: Under both U.S. GAAP and IFRSs, the amount recorded as a loss contingency or provision should be the best estimate of the expenditure required to settle the obligation. If the best estimate of the expenditure is a range, and if one amount in that range represents a better estimate than any other amount within the range, that amount should be recorded (ASC 450-20-30-1 and paragraph 36 of IAS 37). Under U.S. GAAP, if no amount in the range is a better estimate than any other amount, an entity should use the minimum amount in the range for recording the liability (ASC 450-20-30-1). In contrast, under IFRSs, if no amount in the range is a better estimate than any other amount, an entity should use the midpoint of the range for recording the liability (paragraph 39 of IAS 37). If the obligation involves a large population of items, an entity should estimate the liability by weighting all possible outcomes by their associated probabilities (i.e., the probability-weighted expected value is used to measure the liability).
• #7: Under U.S. GAAP, discounting of contingencies is generally not appropriate unless both the timing and the amounts of future cash flows are fixed or reliably determinable. The ability to reliably determine such timing and amounts is based on objective and verifiable information. Under IFRSs, in situations in which discounting may be material, the amount of a provision should be the present value of the future expenditures expected to settle the obligation. See paragraphs 45¨C47 of IAS 37 for further discussion.
• #8: Under U.S. GAAP, losses on firmly committed executory contracts (e.g., purchase, sale, or operating lease contracts) typically are not recognized. Under IFRSs, an entity is required to recognize and measure the present obligation under an onerous contract as a provision (paragraphs 66¨C69 of IAS 37). An onerous contract is one "in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it."
• #9: Under both U.S. GAAP and IFRSs, the standard for recognition of a gain contingency (or contingent asset) is substantially higher than the standard for recognition of a loss contingency. Under U.S. GAAP, a gain contingency is recognized if realization is assured beyond a reasonable doubt. Therefore, virtually all uncertainties, if any exist, about the timing and amount of realization of a gain contingency should be resolved before the gain is recognized in the financial statements. Under IFRSs, a contingent asset is not recognized in the financial statements. Paragraph 33 of IAS 37 states that "when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate" (emphasis added). IAS 37 prohibits the recognition of contingent assets, based on the perspective that including a contingent asset on the balance sheet might result in the recognition of income that is never realized. However, if an inflow of economic benefits is probable (that is, more likely than not 1 ), the contingent asset should be disclosed. Note that if an inflow of economic benefits is virtually certain, then the related asset is not ¡°contingent¡± on an event occurring and, therefore, it should be recognized in the financial statements. https://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/IFRS_E/IAS_37.pdf