Provisions and Contingencies – Introduction
21.1 Provisions and Contingencies applies to all provisions (ie liabilities of uncertain timing or amount), contingent liabilities and contingent assets except those provisions covered by other sections of Provisions and Contingencies. These include provisions relating to: Provisions and Contingencies
- leases (See Leases). However, this section deals with operating leases that have become onerous.
- construction contracts (See Revenue). However this section deals with construction contracts that have become onerous.
- employee benefit obligations (See Employee Benefits). Provisions and Contingencies
- income tax (See Income Tax). Provisions and Contingencies
Provisions and Contingencies – No executory contracts unless onerous contracts
21.2 The requirements in this section do not apply to executory contracts unless they are onerous contracts. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent.
Provisions and Contingencies – Recognition of Liabilities
21.3 The word ‘provision’ is sometimes used in the context of such items as depreciation, impairment of assets, and uncollectible receivables. Those are adjustments of the carrying amounts of assets, instead of recognition of liabilities, and therefore are not covered by Provisions and Contingencies. Provisions and Contingencies
Initial recognition – Provision is an Obligation
21.4 An entity shall recognise a provision only when: Provisions and Contingencies
- the entity has an obligation at the reporting date as a result of a past event;
- it is probable (ie more likely than not) that the entity will be required to transfer economic benefits in settlement; and
- the amount of the obligation can be estimated reliably.
Initial recognition – Recognition as Liability and Expense
21.5 The entity shall recognise the provision as a liability in the statement of financial position and shall recognise the amount of the provision as an expense, unless another section of Provisions and Contingencies requires the cost to be recognised as part of the cost of an asset such as inventories or property, plant and equipment.
Initial recognition – Obligation to settle
21.6 The condition in Initial recognition – Provision is an Obligation sub (a) (obligation at the reporting date as a result of a past event) means that the entity has no realistic alternative to settling the obligation. This can happen when the entity has a legal obligation that can be enforced by law or when the entity has a constructive obligation because the past event (which may be an action of the entity) has created valid expectations in other parties that the entity will discharge the obligation. Obligations that will arise from the entity’s future actions (ie the future conduct of its business) do not satisfy the condition in Initial recognition – Provision is an Obligation sub (a), no matter how likely they are to occur and even if they are contractual. To illustrate, because of commercial pressures or legal requirements, an entity may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a particular type of factory). Because the entity can avoid the future expenditure by its future actions, for example by changing its method of operation or selling the factory, it has no present obligation for that future expenditure and no provision is recognised.
Initial measurement – Best estimate
21.7 An entity shall measure a provision at the best estimate of the amount required to settle the obligation at the reporting date. The best estimate is the amount an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time:
- when the provision involves a large population of items, the estimate of the amount reflects the weighting of all possible outcomes by their associated probabilities. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used.
- when the provision arises from a single obligation, the individual most likely outcome may be the best estimate of the amount required to settle the obligation. However, even in such a case, the entity considers other possible outcomes. When other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount than the most likely outcome. Provisions and Contingencies
When the effect of the time value of money is material, the amount of a provision shall be the present value of the amount expected to be required to settle the obligation. The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money. The risks specific to the liability shall be reflected either in the discount rate or in the estimation of the amounts required to settle the obligation, but not both.
Initial measurement – Exclude gains on expected disposal
21.8 An entity shall exclude gains from the expected disposal of assets from the measurement of a provision. Provisions and Contingencies
Initial measurement – Reimbursement recognition only when virtually certain
21.9 When some or all of the amount required to settle a provision may be reimbursed by another party (for example, through an insurance claim), the entity shall recognise the reimbursement as a separate asset only when it is virtually certain that the entity will receive the reimbursement on settlement of the obligation. The amount recognised for the reimbursement shall not exceed the amount of the provision. The reimbursement receivable shall be presented in the statement of financial position as an asset and shall not be offset against the provision. In the statement of comprehensive income, the entity may offset any reimbursement from another party against the expense relating to the provision.
Subsequent measurement – Only charge of definite expenditure
21.10 An entity shall charge against a provision only those expenditures for which the provision was originally recognised.
Subsequent measurement – Periodical reassessment of best estimate
21.11 An entity shall review provisions at each reporting date and adjust them to reflect the current best estimate of the amount that would be required to settle the obligation at that reporting date. Any adjustments to the amounts previously recognised shall be recognised in profit or loss unless the provision was originally recognised as part of the cost of an asset (see Initial recognition – Recognition as Liability and Expense). When a provision is measured at the present value of the amount expected to be required to settle the obligation, the unwinding of the discount shall be recognised as a finance cost in profit or loss in the period it arises.
21.12 A contingent liability is either a possible but uncertain obligation or a present obligation that is not recognised because it fails to meet one or both of the conditions (b) and (c) in Initial recognition – Provision is an Obligation. An entity shall not recognise a contingent liability as a liability, except for provisions for contingent liabilities of an acquiree in a business combination (see Contingent Liabilities 19.20 and 19.21). Disclosure of a contingent liability is required by Disclosures about contingent liabilities unless the possibility of an outflow of resources is remote. When an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability.
21.13 An entity shall not recognise a contingent asset as an asset. Disclosure of a contingent asset is required by Disclosures about contingent assets when an inflow of economic benefits is probable. However, when the flow of future economic benefits to the entity is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate.
Disclosures about provisions
21.14 For each class of provision, an entity shall disclose all of the following:
- a reconciliation showing:
- the carrying amount at the beginning and end of the period;
- additions during the period, including adjustments that result from changes in measuring the discounted amount;
- amounts charged against the provision during the period; and
- unused amounts reversed during the period.
- a brief description of the nature of the obligation and the expected amount and timing of any resulting payments;
- an indication of the uncertainties about the amount or timing of those outflows; and
- the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
Comparative information for prior periods is not required.
Disclosures about contingent liabilities
21.15 Unless the possibility of any outflow of resources in settlement is remote, an entity shall disclose, for each class of contingent liability at the reporting date, a brief description of the nature of the contingent liability and, when practicable:
- an estimate of its financial effect, measured in accordance with Initial measurement and Subsequent measurement;
- an indication of the uncertainties relating to the amount or timing of any outflow; and
- the possibility of any reimbursement.
If it is impracticable to make one or more of these disclosures, that fact shall be stated.
Disclosures about contingent assets
21.16 If an inflow of economic benefits is probable (more likely than not) but not virtually certain, an entity shall disclose a description of the nature of the contingent assets at the end of the reporting period and, unless it would involve undue cost or effort, an estimate of their financial effect, measured using the principles set out in Initial measurement and Subsequent measurement. If such an estimate would involve undue cost or effort, the entity shall disclose that fact and the reasons why estimating the financial effect would involve undue cost or effort.
21.17 In extremely rare cases, disclosure of some or all of the information required by Disclosures about Provisions, Contingent liabilities or Contingent assets can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.