Understanding ASPE Sections 3280 and 3290 Contractual Obligations and Contingencies

2 | Understanding ASPE Sections 3280 and 3290, Contractual Obligations and Contingencies

Seven questions for private business owners: Contractual Obligations and ContingenciesA better working world begins with better questions. Asking better questions leads to better answers. To help preparers of financial statements with Canadian accounting standards for private enterprises (“ASPE”) Sections 3280, Contractual Obligations, and 3290, Contingencies, we’ve summarized the key aspects of the Sections and offer relevant practical considerations for private mid-market companies through answering seven commonly asked questions.

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n1 What is a contingency?

As defined in paragraph 3290.05, a contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or the incurrence of a liability.

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When is a contingent loss accrued in the financial statements?

The treatment of contingent losses in financial statements depends upon the likelihood that a future event will confirm that an asset had been impaired or liability incurred as at the financial statement date. In accordance with paragraph 3290.12, the amount of a contingent loss shall be accrued in the financial statements by a charge to income when both of the following conditions are met:

� it is likely that a future event will confirm that an asset had been impaired or a liability incurred at the date of the financial statements; and

� the amount of the loss can be reasonably estimated.

How are contingent gains treated in an entity’s financial statements?

Contingent gains are not accrued in financial statements, as this accounting treatment could result in the recognition of revenue that might never be realized.

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n2 How is an uncertainty measured?

The uncertainty relating to the occurrence or non-occurrence of the future event(s), which determines the outcome of a contingency, can be expressed by a range of probabilities that provide a basis for establishing the appropriate accounting treatment. Paragraph 3290.06 identifies three areas of this range by a general description as follows:

� likely — the chance of the occurrence (or non-occurrence) of the future event(s) is high;

� unlikely — the chance of the occurrence (or non-occurrence) of the future event(s) is slight; and

� not determinable — the chance of the occurrence (or non-occurrence) of the future event(s) cannot be determined.

Understanding ASPE Sections 3280 and 3290, Contractual Obligations and Contingencies | 3

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n5 What should be disclosed regarding an entity’s contingent losses?

Per section 3290.20, at a minimum, the note disclosure shall include:

� the nature of the contingency;

� an estimate of the amount of the contingent loss or a statement that such an estimate cannot be made; and

� any exposure to loss in excess of the amount accrued.

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What should be disclosed regarding an entity’s contingent gains?

Paragraph 3290.22 states, when it is likely that a future event will confirm that an asset had been acquired or a liability reduced at the date of the financial statements, the existence of a contingent gain shall be disclosed in notes to the financial statements.

At a minimum, the note disclosure shall include:

� (a) the nature of the contingency; and

� (b) an estimate of the amount of the contingent gain or a statement that such an estimate cannot be made.

What types of contractual obligations should an entity disclose in its financial statements?

Per paragraph 3280.02, particulars of any contractual obligations that are significant in relation to the current financial position or future operations shall be disclosed. These would include significant obligations such as commitments that involve a high degree of speculative risk which are not in the inherent nature of the business and commitments that make expenditures that are abnormal in relation to usual business operations.

To learn more about these items or for application guidance, please contact our Private Mid-Market practice at privatecompanyinfo@ca.ey.com.

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1567865 ED NoneThis publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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