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Section 21: Provisions and Contingencies
Section 21 deals with the recognition, measurement and disclosures for provisions.
Scope
Extract from FRS 102 – Section 21.1-21.3
21.1 This section applies to all provisions (i.e. liabilities of uncertain timing or amount), contingent liabilities and contingent assets except those provisions covered by other sections of this FRS. Where those other sections contain no specific requirements to deal with contracts that have become onerous, this section applies to those contracts.
21.1A This section applies to financial guarantee contracts unless:
(a) an entity has chosen to apply IAS 39 Financial Instruments: Recognition and Measurement and/or IFRS 9 Financial Instruments to its financial instruments (see paragraphs 11.2 and 12.2); OR
(b) an entity has elected under FRS 103 Insurance Contracts to continue the application of insurance contract accounting.
21.1B This section does not apply to financial instruments (including loan commitments) that are within the scope of Section 11 Basic Financial Instruments and 12 Other Financial Instruments Issues. This section does not apply to insurance contracts (including reinsurance contracts) that an entity issues and reinsurance contracts that the entity holds, or financial instruments issued by an entity with a discretionary participation feature that are within the scope of FRS 103 Insurance 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.
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, rather than recognition of liabilities, and therefore are not covered by this section.
OmniPro comment
Based on the above guidance, examples of provisions which come within the scope of Section 21 are provisions for:
- Product warranties and refunds
- Legal claims
- Future operating costs
- Future operating losses (although within scope, Section 21 does not allow provision for future operating losses)
- Onerous contracts
- Financial guarantee contracts
- Dilapidations
- Decommissioning
Examples of provisions which will not come within the scope of Section 21 are:
- Financial instruments in scope under Section 11 and Section 12
- Contingent liabilities acquired in a business combination
- Leases (unless the leases are onerous)
- Losses on construction contracts
- Employee benefits
- Income taxes
- Insurance contracts
- Provision for depreciation (covered by Section 17), doubtful debts (covered by Section 11) and impairments (covered by Section 27)
- Executory contracts unless they are onerous. These are contracts where neither party has carried out any of its obligations or where obligations have been performed by both parties for equal amounts.
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