In rare cases, for example. B in a lawsuit, it cannot be clear whether a company has a current obligation. In such cases, an event per event is considered a current obligation if, given all available evidence, it is more likely that there is a current obligation on the balance sheet closing date. A provision should be recognized for this current obligation when the other recognition criteria described above are met. If there is more likely that there is no current obligation, the entity should disclose a potential liability unless the possibility of an outfever is remote. [IAS 37.15] Before entering into a new contract, make sure you understand the extent of any liabilities. These may appear in your contract in the form of a provision for compensation, guarantee or guarantee. If opportunities arise in the future, the cost of insensitivity of an entire liability may be significant. Contractual commitments you make as a business owner can affect your insurance policies and wealth. You should check that you have appropriate insurance to cover your contractual commitments. If you have any liabilities, you may need to purchase additional insurance for your business. GAAP (generally accepted accounting standards) and ifrs (international financial reporting standards) require companies to account for potential liabilities in accordance with the three accounting principles: full disclosure, importance and prudence.
Because there is common ground for an uncertain liability, IAS 37 also deals with contingencies. It requires that companies not recognize potential liabilities, but disclose them, unless the possibility of a flow of economic resources is far away. [IAS 37.86] It is a good practice to record any liabilities in your financial statements. As an entrepreneur, you should develop a number of liability issues that may arise from a contract. Therefore, you can determine the best financial estimates accordingly. You can estimate how much you need to settle a current obligation by finding an offer for the amount a company would pay rationally. Often, business leaders with experience in similar transactions determine this amount. Potential liabilities may be disclosed in the following business situations: the objective of IAS 37 is to ensure that appropriate accounting criteria and valuation bases are applied to provisions, potential liabilities and potential assets, and that the financial statement schedule reflects sufficient information to enable users to understand their nature , their timing and amount. The principle set out in the standard is that a provision should only be recognized when there is a liability, that is, a current obligation arising from past events.
The aim is to ensure that only real commitments are dealt with in the accounts – planned future expenditures, even if approved by the board of directors or an equivalent governing body, are excluded from recognition.