Similar to German commercial law, it is therefore important to present a proper picture of the assets, financial and earnings situation in IFRS. IFRSs want investors to be able to rely on the information provided to predict future cash flows. Therefore, when accounting for liabilities in accordance with IFRS, it is important to understand, especially in the case of subordinate provisions, how they are mapped and, above all, when they enter the balance sheet. Because of individual events, as exist in part through court proceedings or otherwise also through out-of-court settlements, a high influence on the balance sheet result can take place. If you need support for a complaint before the tax court, the BFH or the European Court of Justice, we are happy to help.

Furthermore, compared to IFRS, HGB has a stronger focus on creditor protection, which leads to pessimistic accounting. IFRSs, on the other hand, prioritize fair value accounting in order to provide a picture of the actual situation. Among other things, there are also further differences to HGB in terms of accounting, which are evident in the case of deferred taxes or the accounting of leased objects.

In the case of International Financial Reporting Standards (IFRS), the claim applies to a presentation of the financial position and profit or loss as realistically as possible. Therefore, liabilities, in particular provisions, are generally measured by the expected value or the most likely value. Here, there are also very often other influences than exclusively concluded contracts, as is usually the case with liabilities. As a result, in the case of the latter, the height can often also be determined clearly and unambiguously.

In comparison, according to HGB, the precautionary principle is considered one of the most important principles. This is because liabilities and, in particular, provisions should be recognised so that they are already known to be sufficiently secure future financial charges and the charges are already included in the period of creation.

In order to present a liability under IFRS, certain criteria need to be reviewed. For now, an outflow of resources must be established. In addition, this outflow of benefits only exists if a current external obligation of the company to third parties has arisen, which is based on a past event. If these criteria are met, it is still necessary to examine the approach in the balance sheet and to determine the value of the liability.

Now it is necessary to distinguish debt into two or even three categories. This shows how certain it is in general that the obligation for the company occurs. A liability is considered a secure liability under accounting law, unlike provisions or contingent liabilities. In addition, it is also possible to distinguish with regard to the amount, whether this can already be precisely quantified or whether the amount of the debt is still uncertain. If the liability is either uncertain about the amount or the maturity, it shall be recorded under the balance sheet item of provisions.

The first thing to check is whether there is a current obligation or whether it is not yet foreseeable and only a possible obligation is in the room. In the case of a current commitment, there would then have to be a probable resource outflow, which is also reliable to estimate. In this case, a provision shall be included in the balance sheet. However, if there is only one possible obligation and the outflow of resources from it is realistic (probability is more than 10 %), IAS 37 requires disclosure of a contingent liability in the notes. This is also the case if there is already a current obligation on the part of the company, but it is very unlikely that the benefits will flow from it or it is very difficult to determine the level of the commitment.

If the obligation to declare a provision exists and has been determined, the estimated amount of this provision must be determined. In contrast to accounting for liabilities, this is much more complicated and sometimes very dependent on estimates. Different starting situations are distinguished here.

If there are payout scenarios that can be assigned with different values of the obligation, the most likely value of the obligation should be used. This assessment is based, for example, on the chances at a court hearing or in legal proceedings. It is logical to carry out an assessment in order to evaluate this. Lawyers are often involved in these issues in order to assess the associated risk.

In the case of warranty provisions or guarantee provisions, for example, the expected value has to be formed differently, because in the case of such legal collection obligations, the future obligation is determined on the basis of experience values. However, since the obligation arises from the sale of products, this is still an event of the past. Otherwise, the definition of a provision would not be met. In addition, there may also be goodwill obligations, depending on the industry, and there is a high competitive pressure, which can lead to de facto obligations.

Furthermore, there are cases in which so-called dismantling obligations are legally agreed. After the construction and use of installations, the starting position must be restored. In order to present the agreed costs, even if they are only incurred in the distant future, a provision is made in accordance with IFRS and discounted annually. In addition, there are provisions for restructuring, which are planned and carried out by management in companies.

IFRS accounting entities often have a public interest, whether through a listing or simply by the size of the company. This also places a special focus on the published balance sheets. Accordingly, very quickly relative relationships are mapped and analyzed internally, but also to previous years. Since percentage assumptions of commitments or percentage values of revenue are often deferred, this offers companies with high revenues very large accounting margins. This poses a problem in terms of balance sheet to the extent to which corporations gloss over their company results in order to continue to generate profits and meet the forecasts of economic experts. Otherwise, a possible reduction is also in the focus of managers in order to have to pay lower dividends and dry up small shareholders. The background to accounting room for manoeuvre is varied and must therefore be viewed critically, because economic bottlenecks can also be concealed by changing the percentage provisions.

On the other hand, environmental disasters such as spent oil platforms or legal proceedings such as those at Bayer due to glyphosate or at VW due to the diesel scandal are very expensive matters. Depending on the assessment of the legal experts, this results in provision volumes of several billion euros. Nevertheless, it should be noted that in court proceedings the formation of provisions is often equated with a defeat and thus almost an admission of guilt. In order for companies to reflect the risk of such disasters, it is nevertheless necessary, in some way, to present obligations that are justified in the past. However, provisioning often also has an impact on the stock market value of a company and thus also far-reaching financial consequences. Therefore, it is generally recognised that provisions are often rather pessimistic and that in the case of higher commitments, the unpredictability of the enormous payment burden is used as an explanation.

Finally, it can be said that the accounting of liabilities and in particular provisions are a very exciting topic under the IFRS and in every annual financial statement topic of conversation. Due to the often capital market-oriented companies, the amount of provisions generally also has consequences for many other capital market participants. Therefore, it is important to know the requirements for the accounting of liabilities under IFRS, in particular provisions. If you have questions about education and dealing with provisions, you can contact us.