View
230
Download
0
Category
Preview:
Citation preview
8/12/2019 Provisions and Contingencies Slides
1/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
http://www.cc.cec/budg/
8/12/2019 Provisions and Contingencies Slides
2/28
2 PwC
Overview of session
1. Scope of application
2. Key concepts
3. Recognition
4. Measurement
5. Disclosures
6. Specific implications / Next steps
7. Questions
8/12/2019 Provisions and Contingencies Slides
3/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
1. Scope of application
8/12/2019 Provisions and Contingencies Slides
4/28
4 PwC
Scope
Covers accounting for all provisions and contingencies,
excluding:
Social benefits provided by an entity for which it does not receive
consideration that is approximately equal to the value of goods or
services provided
Provisions resulting from financial instruments carried out at fair
value
Provisions arising in relation to income taxes
Employee benefits (except those that arise as a result of a
restructuring)
Provisions covered by another IPSAS
8/12/2019 Provisions and Contingencies Slides
5/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
2. Key concepts
8/12/2019 Provisions and Contingencies Slides
6/28
6 PwC
Legal and constructive
obligations
Legal obligation= an obligation that derives from:
A contract (through its explicit or implicit terms); or
Legislation; or
Other operation of law
Constructive obligation= an obligation that derives from an entitys
action where:
By an established pattern of past practice, published policies orsufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
As a result, the entity has created a valid expectation on the part of those
other parties that it will discharge its responsibilities.
8/12/2019 Provisions and Contingencies Slides
7/287 PwC
Liabilities and provisions
Liabilities= present obligations (legal or implicit) of the entity
arising rom past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying
economic benefits or service potential
Provisions= a special category of liabilities = liabilities of
uncertain timing and amount
There must be a clear present obligation from a past obligating
event
8/12/2019 Provisions and Contingencies Slides
8/28
8 PwC
Provisions Write-downs
Provisions
On the liabilities side
Present obligations resulting
from past events
Write-downs
To reduce the carrying value ofassets
E.g. write-down of inventories tonet realisable value; write-down ofproperty, plant and equipment torecoverable amount
Provisions should not be recognised for future
operating losses. An expectation of futureoperating losses is an indication that certain
assets of the operation may be impaired. In
this case, an enterprise tests these assets for
impairment.
8/12/2019 Provisions and Contingencies Slides
9/28
9 PwC
Contingent liabilities and
contingent assets
Contingent liabilities=
Possible obligations that arise from past events and whose
existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not whollywithin the control of the entity
Present obligations that arise from past events but are not
recognised because:
It is not probable that an outflow of resources embodying economic
benefits or service potential will be required to settle the obligation; or
The amount of the obligation cannot be measured with sufficient
reliability
8/12/2019 Provisions and Contingencies Slides
10/28
8/12/2019 Provisions and Contingencies Slides
11/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
3. Recognition
8/12/2019 Provisions and Contingencies Slides
12/28
12 PwC
Provisions - Recognition
A provision should be recognised as a liabilityin the balance
sheet andas an expensein the economic outturn account
when:
An entity has a present obligation(legal or constructive) as a
result of a past event; and
A reliable estimatecan be made of the amount of the obligation;
and
It is probablethat an economic outflow of economic resources
embodying economic benefits or service potential will be required
to settle the obligation.
8/12/2019 Provisions and Contingencies Slides
13/28
13 PwC
Provisions - Recognition
Decision Tree
Present
obligation as a result of an
obligating event?
Probable
Outflow?
Reliable
estimate?
Possible
obligation?
Remote?
Start
ProvideDisclose contingent
liabilityDo nothing
yesno
no
nono
yes
yes
yesyes
no
8/12/2019 Provisions and Contingencies Slides
14/28
14 PwC
Examples
Item True/False
1. Warranties given where some claims are more likely than not
2. Board decision which has not been communicated to those affected
3. Future operating losses
4. Pollution that an entity is obliged to clean up
5. Staff retraining needed as a result of law changes
6. Court case where a loss seems more likely than not
7. Repairs and maintenance
8. Single guarantee for which there is no probable outflow of economic
benefits
8/12/2019 Provisions and Contingencies Slides
15/28
15 PwC
Specific application of
recognition criteria
Restructuring provisions
Programme which materially changes scope of business
Following two conditions need to be met to be recorded as
provision
Detailed plan identifying key features of programme and its
implementation must exist at balance sheetdate
Must be valid expectation that business will undergo restructuring
Can only include direct expenses associated with restructuring
programme; cannot relate to ongoing operation of business
8/12/2019 Provisions and Contingencies Slides
16/28
P
8/12/2019 Provisions and Contingencies Slides
17/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
4. Measurement
8/12/2019 Provisions and Contingencies Slides
18/28
18 PwC
Measurement
Best estimate at balance sheet date of amount needed
to settle obligation
If range is predicted with all the same likelihood of
occurrence, mid point must be selected Large population of itemsexpected value
measurement
Anticipated cash flows must be discounted at risk free
rate where changing value of money over time ismaterial:
- Carrying value of liability increases by imputed interest
in each period; recognised as interest expense in
income statement
8/12/2019 Provisions and Contingencies Slides
19/28
19 PwC
Measurement
Worked example
A government medical laboratory provides diagnostic
scanners with a one-year guarantee for parts and
labour.
Experience indicates that 70% of the diagnosticscanners will not be the subject of warranty claims, 25%
will have minor defects and 5% will require replacement
or major work. 100,000 units were provided in the
current year. Major repair or replacing the unit costs
approximately 25. Minor repairs cost 5 each.
8/12/2019 Provisions and Contingencies Slides
20/28
20 PwC
Measurement
- Worked example
The estimated warranty expense and the warranty provision should be determined by
applying the probability of each outcome to the cost of each outcome as follows:
Expected Value
70% x nil nil
25% x 100,000 x 5 125,000
5% x 100,000 x 25 125,000
Estimated warranty expense 250,000
The warranty provision will be reduced to the extent of costs already incurred in
respect of warranty claims on vacuum cleanerssold during the year.
8/12/2019 Provisions and Contingencies Slides
21/28
21 PwC
Measurement
- Worked example
The E.C. have litigation pending. Legal advice is that the E.C. will lose the case, and costs
of1,200 in two years time are estimated. The appropriate discount rate is 4.5 %.
Discount factor at4.5%
NPV Cash flows Additional costs
At inception 0.9157 1,099 -
Year 1 0.9569 1,148 - 49
Year 2 1.0000 1,200 1,200 52
Economic outturn
accountBalance sheet
8/12/2019 Provisions and Contingencies Slides
22/28
22 PwC
Other issues
Reimbursement:
To be recognised when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the obligation
The reimbursement should be treated as a separate asset
In the economic outturn account, the expenses relating to a
provision may be presented net of the amount recognised for the
reimbursement
Use of provision:
A provision should be used only for expenditures for which the
provision was originally recognised.
P C
8/12/2019 Provisions and Contingencies Slides
23/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
5. Disclosures
8/12/2019 Provisions and Contingencies Slides
24/28
24 PwC
Disclosures - Provisions
Key disclosures required:
Accounting policies for each major type ofprovision (for example, warranties)
Movements in provisions during the period
Descriptions of contingent liabilities and
contingent assets
8/12/2019 Provisions and Contingencies Slides
25/28
25 PwC
Disclosures - Guarantees
Guarantees for pre-financing received for procurement and for
grants
Performance guarantees:
Regular performance guarantees: disclose
Specific guarantees related to performance guarantees: do not
disclose but consider as they are automatically activated and are
in essence a liability towards the contractor
Guarantees given or received by the DG ECFIN for borrowingsand loans
Guarantees received by the DG BUDG when fines are disputed
P C
8/12/2019 Provisions and Contingencies Slides
26/28
PwC
Provisions,
Contingent Liabilities
and Contingent Assets
6. Specific implications /
Next steps
8/12/2019 Provisions and Contingencies Slides
27/28
27 PwC
Ensuring compliance with
the new rules
Caption Provision under
IPSAS 19?
Comments Current treatment
Dismantlement of
nuclear installations
Yes Annual estimates Yes
Pensions +
employee benefits
Yes Yes
Food-and-mouth
disease
Yes Minimum in the range of
possible outcomes
Maximum possible outcome
disclosed
Yes
Legal disputes Yes On a case by case basis Yes
PwC
8/12/2019 Provisions and Contingencies Slides
28/28
PwC
Provisions,
Contingent Assets and
Contingent Liabilities
7. Questions
http://www.cc.cec/budg/
Recommended