Probable vs likely, expected value vs lowest in range

One lawsuit, two frameworks

Boreal Bikes is defending a second product claim. Counsel says a loss is more likely than not, and that damages will fall somewhere between $100,000 and $300,000 — every amount in that range about equally likely, with no single best estimate. Boreal is preparing statements for a lender under both frameworks. The obligation is the same; the number on the balance sheet is not.

Under IFRS (IAS 37), the provision is measured at the best estimate. Where a continuous range of equally likely outcomes exists, the best estimate is the midpoint:

$$\frac{100,000+300,000}{2}=200,000$$

Dr Legal Expense                       200,000
    Cr Provision for Lawsuit                     200,000

Under ASPE (Section 3290), when no amount within a range is a better estimate than any other, the entity accrues the lowest amount in the range and discloses the range and the exposure above it:

Dr Legal Expense                       100,000
    Cr Accrued Liability for Lawsuit             100,000

The note under ASPE says the accrual is 100,000 and the additional exposure is up to 200,000. Neither framework records 300,000: the top of the range is the trap, and so is recording the midpoint under ASPE.

The threshold: probable versus likely

IAS 37 recognises when an outflow is probable, which it defines as more likely than not — over 50 %. ASPE recognises when it is likely. The course reads likely as a higher bar than IFRS's more-likely-than-not: an outcome can be probable under IFRS (say 55 %) and not yet likely under ASPE, so IFRS recognises more provisions, earlier. When an item is not likely under ASPE but not remote either, it is disclosed as a contingency — the same disclose-or-nothing outcome as IFRS's contingent liability.

Constructive obligations: IFRS yes, ASPE legal-only

Cobalt Ridge Mining (L6.6) has publicly committed to restore every site it operates, including two where its licence carries no restoration clause. Under IFRS the public commitment creates a constructive obligation — the company has raised a valid expectation in the community that it will act — and IAS 37 recognises a provision for the constructive obligation exactly as for a legal one. Under ASPE the asset-retirement obligation is recognised only for legal obligations; a published policy creates no accounting liability, however firm the commitment. Same promise, a provision under one framework and a sentence in the MD&A under the other.

The words are different too

IFRS calls the recognised liability a provision and the unrecognised one a contingent liability. ASPE has no separate provisions standard: the recognised amount is an accrued liability (or contingent liability accrual), and contingent liability in ASPE usage may refer to the whole class of uncertain obligations, recognised or not. On an exam, use the framework's own word: provision under IFRS, accrual under ASPE.

Disclosure

IFRS requires, for each class of provision, the opening and closing balances, additions, amounts used and reversed, the nature and expected timing of the outflow, and the uncertainties — a full roll-forward. ASPE's disclosure is lighter: the nature of the contingency, the amount accrued, and the exposure beyond it (the range) where an amount has not been accrued in full. The earnings effect follows from all of this: for the same facts, IFRS reports the lower income now, because it recognises at a lower threshold, at the midpoint rather than the bottom of a range, and for constructive as well as legal obligations.