However, under US GAAP, the accounting for related legal costs is subject to an accounting policy election. IFRS does not provide specific guidance on recognizing related costs. These differences are illustrated in the following example.įor a legal claim, a significant consideration may be the related costs that a company expects to incur – e.g. Unlike IFRS, under US GAAP the low end of the range is used if no estimate is better than any other. If there is a continuous range of possible outcomes and no one point in the range is considered more likely than another point, the mid-point of the range is taken as the best estimate under IFRS.Unlike IFRS, under US GAAP the single most likely outcome within the range is used without consideration of the other possible outcomes. For example, if the most likely outcome is that a legal claim will be settled for $100, but the other possible outcomes are mostly higher than $100, then the provision should be measured at some amount higher than $100. The most likely outcome is generally taken as the measurement however, other outcomes may affect the measurement if they are mostly higher or mostly lower than the most likely amount.The following is in the context of a legal claim – i.e. Given the uncertainties inherent in determining an estimate, best estimates are based on management’s judgment of all possible outcomes and their financial effect, and should also factor in relevant past experience with similar transactions.ĭifferences between IFRS and US GAAP become apparent when applying the measurement principle. This is the amount that a company would rationally pay to settle the obligation, or to transfer it to a third party, at the end of the reporting period. Under both IFRS and US GAAP, the amount recognized as a provision is the best estimate of the expenditure to be incurred. The assessment considers all available evidence, including post-reporting date events and any other precedents. In such cases, subject matter experts may be required to estimate the likelihood of an outflow of resources. a legal claim that is disputed by the company. In some cases, it may not be clear whether a present obligation exists, even if there is a past event – e.g. Before an actual claim is made, the provision or loss contingency represents an ‘unasserted claim’. For example, in the case of a legal claim filed by a customer injured by a company’s product, the past event is the actual incident in which the injury happened, which is when the provision (loss contingency) should be recognized – not when the claim was filed – assuming the other recognition criteria are met. Instead, the obligation is disclosed as a loss contingency unless its occurrence is remote.Īpplying these principles to a legal claim, the past event is the event that gives rise to the litigation, rather than the claim itself. Like IFRS, if any of these conditions is not met, no loss contingency is recognized. Instead, the obligation is disclosed as a contingent liability unless its occurrence is remote. If any of these conditions is not met, no provision is recognized. Like IFRS the amount can be estimated reasonably.In many cases, this difference will not change the practical outcome and the threshold will be met under both frameworks. Probable in this context means 'likely to occur', which is a higher threshold than IFRS. It is probable that an outflow of resources (typically a payment) will be required to fulfill the obligation.However, unlike IFRS, a constructive obligation is not recognized under the general model in ASC 450. Like IFRS, a past event gives rise to a present obligation.more likely than not – that an outflow of resources (typically a payment) will be required to fulfil the obligation. ![]() ![]() A past event gives rise to a present obligation (legal or constructive). ![]() Recognize when all of the following criteria are met:
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