4) SUMMARY
The objective of this article is to demonstrate that the international accounting regulations regarding contingent liabilities present an important caveat that gives rise to the opportunity of what we call “fortuitous or remote probability liabilities” and that therefore, represents a future opportunity area for international accounting regulations
5) CONTENT
The origin of this study is the proposal of the need for the inclusion within the notes to the financial statements of what we call the “fortuitous or remote probability liability” or its similar concept.
We have proposed the previous term by analyzing the international accounting standard number 37 (published in the Official Gazette of the European Union dated October 13, 2003 and in force since July 1, 1999 before the IASC), which speaks of provisions, assets and contingent liabilities. This standard includes:
1. Provision is a liability with uncertainty of amount and maturity (paragraph 10 IAS 37) and for the recognition of provisions, these must be present, probable obligations and that have a reliable estimate (paragraph 14 IAS 37).
2. Contingent liability is (IAS 37 paragraph 10):
a) A possible obligation arising from a past event and whose existence will be confirmed by the occurrence of an event beyond the company's control.
b) A present obligation arising from a past event that has not been recognized in accounting because it lacks a reliable valuation and it is not probable that the company will dispose of resources.
Subsequently, IAS 37 in its paragraph 16 indicates that provisions (that is, their accounting) are recognized when the present obligation is more likely to exist than if it does not exist, otherwise, the contingent liability must be disclosed (only inform in notes) "EXCEPT" in case of remote possibility.
But our fortuitous or remote probability liability is neither of the above cases (provision and contingent), however it can have a great impact on the ongoing business. It has a place by virtue of the exception that contemplates the disclosure of the contingent liability and that the international accounting standards set forth within the text of "INTRODUCTION" of IAS 37 paragraph four last lines: "… the company will proceed to reveal the existence of a contingent obligation, except in the case in which the possibility of outflow of resources incorporating benefits to cancel it is remote ”. That is to say, when the possibility of such contingent liability is considered remote, it exempts its disclosure, then, the opportunity area of our study.
Therefore, international accounting standards establish that when there is uncertainty in a present obligation, it is due to its due date and its amount, an accounting provision must be recognized. Subsequently, if such provision is less likely to exist than not, then recognize the contingent liability in notes, and if it is remote that such contingent liability occurs, then it is exempt from any obligation to report. So our “fortuitous or remote probability liability” is more related to contingent liability, of which we want to point out what the latter contemplates in IAS 37 paragraph 18 of the Introductory text of said standard:
1. Any possible obligation arising from past events, the existence of which will be confirmed only if the aforementioned events occur and which are not under the control of the company.
2. Any present obligation arising as a result of past events, not recognized in financial statements (that is, not in provision) because it is not probable that the company will need to part with resources or that the amount of said obligation cannot be reliably measured..
In the following table we will highlight the main differences between provisions and contingent liabilities:
Illustratively, the contingent liability arises when in a present or possible obligation, its probability of not existing is greater than that of existing:
On the other hand, with respect to our “fortuitous or remote probability liability”, the differences would be that the possible obligation does not necessarily arise from some past event and does not wait to be confirmed, only its risk is considered due to the impact on the business on going. On the other hand, it is not a present obligation, but if it occurs it can significantly affect the business in progress, which goes beyond the outflow of resources.
Regarding the valuation with reliability, it shares the philosophy of the contingent liability which cannot be valued reliably but for this purpose we propose that its amount does not exceed the value of the asset lost, disappeared or a similar term in this regard.
Therefore, our subject under study does not represent a present obligation nor does it arise from an event that occurred in the past. On the other hand, the contingent liability has the disclosure limit in case such an obligation is considered remote, in our study, we consider that such a limitation should not exist due to the impact on the going concern that could arise. The main differences between the contingent liability and the proposed casualty can be summarized in the following table:
It should be noted, among others that there must be, events that are outside the scope of this study because they are already considered in the international accounting standard 37 such as modifications in the laws of the countries and because of an implicit obligation created by it. company (when it has committed to, for example, to restore the environment that it has polluted, etc.). Both of the above situations represent the past events from which the obligation derives from both provisions and contingent liabilities. In addition, the following situations that are indicated in said standard are out of this study as they are considered within IAS 37:
- Future losses derived from operations: which should be treated under IAS 36 “impairment of assets” (paragraph 11 of the introductory text of IAS 37). Contracts of an onerous nature, make provision if it is a present obligation, there is a reliable estimate, and resources are likely to be disposed of. (paragraph 12 of the introductory text of IAS 37) Provision for restructuring costs, if it is a present obligation, there is a reliable estimate, and it is probable that resources will be released. (paragraphs 13 to 17 of the introductory text of IAS 37) Valuation of financial instruments at fair value (paragraph 1, IAS 37), then apply IAS 39 Outstanding non-onerous contracts (paragraph 1, IAS 37) Those that appear in the insurance company derived from the policies of the insured, apply IFRS 4:Insurance contracts. (paragraph 1, IAS 37).Those covered by another accounting standard (paragraph 5, IAS 37), for example:
to. IFRS 3: Contingent liabilities in business combinations.
b. IAS 11, Construction contracts.
c. IAS 12, Income taxes.
d. IAS 17, Leases.
and. IAS 19, Employee benefits.
Therefore, the main differences of the “fortuitous or remote probability liability” reason for our study in relation to the provisions is that it is not a present obligation, and with the contingent liability it is that it is not rooted in a past event and that it will be disclosed its occurrence being remote. However, we are talking about events that by chance, not scheduled and outside the control of the company, can generate ongoing business problems for the entity in other words, we are talking about non-quantified risks:
Finally, we propose a presentation format to be developed which we consider would be an X-ray of the asset shown in the balance sheet at a specific date.
It should be noted that in December 2003, IAS 10, “Events after the balance sheet date,” was issued, which requires disclosure of such events that occurred from the balance sheet date to the financial statements authorization date. In the same way, these events after the balance sheet date may put the ongoing business at risk, however, in the subject matter of our study, the “fortuitous or remote probability liability” continues to persist even on the date of authorization of financial statements, that is, it will never be a subsequent event to which the aforementioned IAS 10 refers. IAS 10 states that there are 2 types of events considered to be events after the balance sheet date (paragraph 2, IAS 10):
1. Those that provide evidence of conditions that existed at the balance sheet date, which imply accounting adjustments.
2. Those that provide evidence of conditions that have appeared after the balance sheet date and that do not imply accounting adjustments.
In the first case, the subject of our study will never generate an accounting adjustment and the condition referred to in IAS 10 in this first case, does not exist at the balance sheet date, only the remote risk of appearing is forecast. In the second case of IAS 10, when events have occurred between the balance sheet date and the date of authorization of the financial statements, treatment must first be given in accordance with IAS 10 and 37, if applicable, therefore, before be a “fortuitous or remote probability liability”, which continues to be remote probability as of the date of authorization of the financial statements, the event must be recognized in accordance with IAS 10 as a subsequent event and IAS 37 as a provision or contingent liability in your case. The following table illustrates the aforementioned:
Finally, the transition from a casual liability to a real liability should follow the following process:
In conclusion, the international accounting standard presents a limitation in the disclosure of remote risks, by virtue of the fact that it does not require their disclosure through the international accounting standard number 37, where it considers an exception in the event that the event that originates the obligations be “remote”. This exception in our judgment, represents an area of opportunity in the future in international accounting regulations, especially because we are living in the age of risks, where what was previously unimaginable is now, and everything that somehow seems to be a remote risk, it could stop being so and become something with a closer possibility of happening, for example, how remote can the occurrence of a tsunami be in a coastal area?Will this be a very remote event for hotel companies on certain coasts of the world? Should the financial statements disclose such risk? To conclude, the purpose of considering this fortuitous or remote probability liability in the financial statements is to provide more transcendental information to the user, considering risks that according to the definition of “contingent liability” were not included as they were considered “remote”. This need for information has its essence in something similar to that expressed in the following sentence: "For companies, not forecasting future risk scenarios is a deficiency, but not wanting to forecast them is worse …….."The purpose of considering this fortuitous or remote probability liability in the financial statements is to provide more transcendental information to the user, considering risks that according to the definition of “contingent liability” were not included as they were considered “remote”. This need for information has its essence in something similar to that expressed in the following sentence: "For companies, not forecasting future risk scenarios is a deficiency, but not wanting to forecast them is worse …….."The purpose of considering this fortuitous or remote probability liability in the financial statements is to provide more transcendental information to the user, considering risks that according to the definition of “contingent liability” were not included as they were considered “remote”. This information need has its essence in something similar to what is expressed in the following sentence: "For companies, not forecasting future risk scenarios is a deficiency, but not wanting to forecast them is worse ……..""For companies, not forecasting future risk scenarios is a deficiency, but not wanting to forecast them is worse ……..""For companies, not forecasting future risk scenarios is a deficiency, but not wanting to forecast them is worse …….."
Bibliography:
International Accounting Standards number 37 (Provisions and contingent liabilities) and number 10 (Events after the end of the year).
Download the original file
