Friday, July 27, 2007

J-GAAP: Provisions and Contingencies

In IAS 37 (1998), Provisions, Contingent Liabilities and Contingent Assets, provisions are built on the definitions of liabilities. Uncertainty in amount and timing of future cash outflows involves recognition of provisions. The definition of provisions includes constructive obligations as well as legal obligations.

In Japan, recognition criteria for provisions were set forth based on the revenue and expense view. This approach allows entities to recognize liabilities that are not legal obligations, such as provisions for bad debt loans and provisions for future asset-maintenance expenditures. Japanese GAAP sets forth the following criteria; (a) future outflows of cash and other resources are identified, (b) the outflows occur as a result of the events during current or past accounting periods, (c) it is probable that such outflows occur, and (d) the outflows are measurable with reliability. Those criteria are generally consistent with recognition criteria prescribed by IAS 37.

If it is not probable that future outflows of resources occur, contingent liabilities are not recognized under Japanese GAAP. Such treatment is not inconsistent with IAS 37, which states that a contingent liability is not recognized if future outflow of resources is not probable to occur or if it is not measurable with reliability. However, interpretation about “probability” criterion in both standards does not look similar. Japanese GAAP generally requires that it must be “highly probable,” as literally translated in English so as to be recognized in the balance sheet.

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