IFRS has one standard for provisions – IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. Under Canadian GAAP there is less guidance, and although one related source is CICA 3290 – Contingencies, accountants typically fall back on the fundamental definition of a liability.
The difference between IFRS and Canadian GAAP will depend on the type of provision being considered. Differences may arise in both recognition and measurement of provisions.
Recognition of a provision is based on the probability that you are going to make a payment, or deliver some other asset to fulfill the obligation. Under Canadian GAAP, a provision is based on the “likely” probability that a payment will be required. In comparison, provisions under IFRS are based on a “more likely than not” probability. “Likely” is often taken to be a different and less stringent threshold and therefore it is anticipated that there will be additional provisions under IFRS as compared to Canadian GAAP.
Another important IFRS distinction for provisions is the notion of “constructive obligations” – which are not necessarily legal, but rather where valid expectations have been created to settle an obligation. As an example, a company causes damage to be done to the environment and it needs to be cleaned up. The company commits to the restoration, and this is communicated to external stakeholders. This in turn has created a valid expectation to incur clean up costs among third parties – therefore this is a “constructive obligation”.
There are 2 specific areas under Canadian GAAP where you recognize a provision only on the basis of a legal obligation:
1. Asset Retirement Obligations (3110). These are referred to as “decommissioning” liabilities under IFRS (IFRIC 1).
2. Restructuring Provisions (EIC 134 and 135). IAS 37 contains the comparable definitions.
Terminology and measurement may be different between Canadian GAAP and IFRS, so these standards must be reviewed carefully.
So what does this mean to your organization for the switch to IFRS?
1. Assess whether any additional provisions exist under IFRS that didn’t exist with Canadian-GAAP:
a. Due to the “more likely than not” probability threshold difference.
b. Assess whether there are Constructive obligations, in addition to legal obligations.
2. Assess whether the $ amount of all provisions under Canadian GAAP is different and adjust any difference.
Obligations are another area where there may be changes to IFRS prior to January 2011, and therefore these particular standards must be closely monitored as we proceed through the coming months and years.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the Edelkoort Smethurst Schein CPA’s LLP web-site and please remember to contact your CGA or other accounting professional for further guidance.