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asset is disclosed. 

2.3 IAS 37 flow chart 

You must practise the questions below to get the hang of the IAS 37 rules on contingencies. But first, 

study the flow chart, taken from IAS 37, which is a good summary of its requirements. 

 

 

 EXAM FOCUS POINT 

If you learn this flow chart you should be able to deal with most questions you are likely to meet in the 

exam. 

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CHAPTER 11  

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  PROVISIONS AND CONTINGENCIES 

 

203 

 

 

 

Start 

Present obligation as a 

result of an obligating 

event? 

Probable 

outflow? 

Reliable 

estimate? 

Provide 

Possible 

obligation? 

Possible 

outflow? 

Disclose contingent 

liability 

Do 

nothing 

No

No 

No 

No

 

(Rare) 

Yes

Yes

Yes

Yes

Yes

No

 

(IAS 37, Appendix B) 

QUESTION 

Provisions and contingencies I

 

During 20X9 Smack Co gives a guarantee of certain borrowings of Pony Co, whose financial condition at 

that time is sound. During 20Y0, the financial condition of Pony Co deteriorates and at 30 June 20Y0 

Pony Co files for protection from its creditors. 

What accounting treatment is required: 

(a) 

At 31 December 20X9? 

(b) 

At 31 December 20Y0? 

ANSWER 

(a) 

At 31 December 20X9 

There is a present obligation as a result of a past obligating event. The obligating event is the 

giving of the guarantee, which gives rise to a legal obligation. However, at 31 December 20X9 no 

transfer of economic benefits is probable in settlement of the obligation. 

No provision is recognised. The guarantee is disclosed as a contingent liability unless the 

probability of any transfer is regarded as remote. 

An appropriate note to the accounts would be as follows. 

Contingent liability 

The company has given a guarantee in respect of the bank borrowings (currently $500,000) of 

Pony Co. At the reporting date, Pony Co was sound and it is unlikely that the company will be 

required to fulfil its guarantee. 

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