Provisions, Employee Benefits and Share-based Payment
Provisions, employee benefits and share-based payment
This domain tests IAS 37 recognition and measurement, IAS 19 defined benefit mechanics and IFRS 2 equity and cash-settled awards. A provision requires a present obligation from a past event, a probable outflow and a reliable estimate. Measure at the best estimate, discount if the time value is material, and include risks but not future operating losses. Contingent liabilities are disclosed unless remote; contingent assets are not recognised until virtually certain.
- Defined benefit: use the projected unit credit method; service cost and net interest go to profit or loss; remeasurements go to OCI.
- IFRS 2 equity-settled awards are measured at grant-date fair value and expensed over the vesting period; adjust for expected forfeitures.
- Cash-settled awards are remeasured to fair value at each reporting date.
- Onerous contracts: provision for unavoidable costs, measured at the lower of the cost of fulfilment and compensation or penalties.
Worked example
A warranty provision uses sales of 1,000,000 and a historical warranty cost of 2%, giving an expected cost of 20,000. If settlement is expected in 12 months, no discounting is needed. If settlement is expected in 3 years and the discount rate is 5%, recognise 20,000/1.05^3 = 17,277, with the unwinding of the discount recognised as a finance cost. Review the provision each year.
Traps
- Provisioning a future operating loss.
- Recognising a contingent asset before virtual certainty.
- Using expected return on plan assets instead of the discount rate for net interest.
- Forgetting to update forfeiture estimates for equity-settled awards.