ACCA Strategic Business Reporting (SBR) Practice Exam

What is a requirement for recognizing provisions under IAS 37?

1. There must be a future obligation expected to arise

2. A past event must create a present obligation

3. The economic resources must be depleted

4. The obligation must arise from contingent assets

The correct answer is: A past event must create a present obligation

To recognize provisions under IAS 37, a past event must create a present obligation. This is fundamental to the standard, which outlines that a provision is recognized when an entity has a present obligation (legal or constructive) as a result of a past event. This past event gives rise to the obligation to transfer economic benefits in the future, such as settling a liability. Recognizing a provision is based on the certainty of the obligation arising from past events, rather than merely the expectation of future obligations or the future depletion of economic resources. This ensures that liabilities are appropriately matched to the period they arise from, reflecting the true financial position of the entity. The requirement that the obligation must stem from a past event assures that provisions are recorded based on commitments that are grounded in the past rather than speculative future actions, thus promoting accuracy in financial reporting. In contrast, future obligations expected to arise or obligations that arise from contingent assets do not meet the definition of a provision under IAS 37. Contingent assets are recognized only when realizable and do not create binding obligations in the same manner that provisions do.