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No provision without a past obligating event

The government introduces a number of changes to the income tax system. As a result of these changes, an entity in the financial services sector will need to retrain a large proportion of its administrative and sales staff in order to ensure continued compliance with financial services regulation. At the end of the reporting period, no training has taken place.

In these circumstances, no event has taken place at the reporting date to create an obligation. Only once the training has taken place will there be a present obligation as a result of a past event. [IAS 37 Appendix C, Example 7].

IAS 37 prohibits certain provisions that might otherwise qualify to be recognised by stating that it ‘is only those obligations arising from past events existing independently of an entity’s future actions (i.e. the future conduct of its business) that are recognised as provisions’. In contrast to situations where the entity’s past conduct has created an obligation to incur expenditure (such as to rectify environmental damage already caused), a commercial or legal requirement to incur expenditure in order to operate in a particular way in the future, will not of itself justify the recognition of a provision. It argues that because the entity can avoid the expenditure by its future actions, for example by changing its method of operation, there is no present obligation for the future expenditure. [IAS 37.19].