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Section 21 – Introduction
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Section 21 – Analysis
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- Section 1
- Section 2
- Section 3
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 9
- Section 10
- Section 11
- Section 12
- Section 13
- Section 14
- Section 15
- Section 16
- Section 17
- Section 18
- Section 19
- Section 20
- Section 21
- Section 22
- Section 23
- Section 24
- Section 25
- Section 26
- Section 27
- Section 28
- Section 29
- Section 30
- Section 31
- Section 32
- Section 33
- Section 34
- Section 35
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- Section 1
- Section 2
- Section 3
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 9
- Section 10
- Section 11
- Section 12
- Section 13
- Section 14
- Section 15
- Section 16
- Section 17
- Section 18
- Section 19
- Section 20
- Section 21
- Section 22
- Section 23
- Section 24
- Section 25
- Section 26
- Section 27
- Section 28
- Section 29
- Section 30
- Section 31
- Section 32
- Section 33
- Section 34
- Section 35
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Section Downloads
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Section 21: Provisions and Contingencies.
21.1.1 Extract from FRS 102 – Section 21.1-21.3.
21.1.2 OmniPro comment – Scope.
21.2 Initial recognition and subsequent measurement
21.2.1 Extract from FRS 102 – Section 21.4-21.11.
21.2.2.1 Conditions required to recognise a provision.
21.2.2.1.1 a) Present obligation as a result of a past event
21.2.2.1.1.1 Legal obligation.
21.2.2.1.1.2 Constructive obligation.
21.2.2.1.1.2.2 Refunds Policy.
21.2.2.1.3.1 Changes in income tax system.
21.2.2.1.3.2 Provision required for a future date.
21.2.2.1.3.3 Difficulty is assessing if a present obligation on a result of a past event exists.
21.2.2.1.3.4 Profits on disposal of fixed assets excluded.
21.2.2.1.3.5 Reimbursement by a third party for costs.
21.2.2.1.3.6 Weighted Probabilities.
21.2.2.1.2 b) Probability of transfer of economic benefits.
21.2.2.1.3 c) Obligation can be reliably measured.
21.2.2.1.4 Present value and the discount rate to be used.
21.2.2.1.5 Change in estimate and discount rates.
21.3.1. Extract from FRS 102 – Section 21.10-21.11A.
21.3.2 OmniPro comment – Onerous contracts.
21.4.1 Extract from FRS 102 – Section 21.11B.
21.4.1.1 OmniPro comment – Future operating losses.
21.5.1 Extract from FRS 102 – Section 21.11C-21.11D.
21.5.2 OmniPro comment – restructuring.
21.5.2.1 Definition and examples.
21.5.2.2 Restructuring and a constructive/legal obligation.
21.5.2.2.1 Examples that illustrate a detailed restructuring plan.
21.5.2.2.2 Examples of items that may be included in restructuring provision.
21.5.2.2.3 Examples of items that may not be included in restructuring provision.
21.6.1 Extract from FRS 102 – Section 21.12.
21.6.2.1 Contingent liability – definition and when it arises.
21.6.2.1.1 Exception to non-recognition of contingent liabilities.
21.6.2.3 Contingent liability examples.
21.7.1 Extract from FRS 102 – Section 21.13.
21.7.2 OmniPro comment – Contingent assets.
21.8 Decommission costs/ reinstatement/dilapidation provision.
21.10.1 Disclosures about provisions.
21.10.1.1 Extract from FRS 102 – Section 21.14.
21.10.1.2 OmniPro comment – Disclosures about provisioning.
21.10.1.2.1 Extract from accounting policy note – Provisions.
21.10.1.2.2 Remediation provision/environmental provision accounting policies.
21.10.1.2.3 Extract from notes to the financial statements – Provisions.
21.10.2 Disclosures about contingent liabilities.
21.10.2.1 Extract from FRS 102 – Section 21.15.
21.10.2.2 OmniPro comment – Contingent liability disclosures.
21.10.2.2.1 Accounting policy disclosure – Contingencies.
21.10.3 Disclosures about contingent assets.
21.10.3.1 Extract from FRS 102 – Section 21.16.
21.10.3.2.1 Accounting policy – Contingent assets.
21.10.4 Prejudicial disclosures.
21.10.4.1 Extract from FRS 102 – Section 21.17.
21.10.4.2 OmniPro comment – Prejudicial disclosures.
21.10.4.2.1 Extract from notes to the financial statements showing prejudicial disclosure.
21.10.5 Disclosure about financial guarantee contracts.
21.10.5.1 Extract from FRS 102 – Section 21.17.
21.10.5.2 OmniPro comment – Financial guarantee contract disclosures.
21.10.5.2.1 Financial guarantee contract example disclosures.
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Section 21 Provisions and Contingencies Quick Guide (PDF) (99 downloads )
Summary
Section 21 applies to all provisions, contingent liabilities and contingent assets, except those covered by other sections of FRS 102. For example, leases, construction contracts, employee benefits and income tax. It does not apply to executory contracts unless they are onerous contracts.
What is new?
Section 21 requires a number of disclosure which were not required under old GAAP, these being disclosures:
- detailing the expected amount of payments resulting from an obligation; and
- detailing the nature and business purpose of any financial guarantee contracts in scope of the standard regardless of whether any provision is required or contingent liability is to be disclosed (Section 21.17A).
What is different?
Section 21 makes it clear that provisions should not be recognised for future operating losses. Old GAAP (FRS 12) had the same principal, however, where FRS 3 of old GAAP applied and a decision had been made to terminate an operation (i.e. the entity was committed to the sale or termination of the operation at the balance sheet date) then a provision could be created for future operating losses and netting against future profits up to the date of termination or sale. Section 21 does not allow for such a provision to be created.
Section 21 does not require the below disclosures which were previously required under old GAAP:
- Major assumptions concerning future events that may affect the amount required to settle an obligation.
- A separate line item in the reconciliation of opening and closing balances detailing the movement as a result of discounting instead this can be shown in the additions line (Section 21.14 (a) (ii)).
For FRS 26 adopters, under old GAAP, financial guarantee disclosures were dictated by FRS 29 which were more detailed and the financial guarantee was required to be fair valued.
Section 21 deals with all provisions, contingent assets and contingent liabilities other than where they are not dealt with by other standards. However, if there are onerous contracts which are not specifically dealt with by the other standards; Section 21 applies (Section 21.14). This differs under old GAAP in that where onerous contracts were not dealt with by other standards there was no requirement to apply FRS 12 except for onerous leases.
What are the key points?
A provision should be recognised where there is a present obligation (either legal or constructive) as a result of a past event and where a transfer of economic benefits is probable to settle the obligation and the obligation can be reliably measured.
Provisions are measured at the best estimate of the amount required to settle the obligation at the reporting date and should take into account the time value of money where material. The provision is then adjusted at each reporting date. The unwinding of any discount is included within finance costs.
Contingent assets are not recognised and instead disclosed if their likelihood is probable.
Contingent liabilities are disclosed unless the possibility of an outflow of resources is considered remote in which case no disclosure is required. A contingent liability arises where the outflow of economic benefits cannot be measured reliably or it is not probable that an outflow of economic benefits will be required.
Section 21.17 allows companies not to disclose certain details in relation to provisions, contingent liabilities and assets on the basis it would be prejudicial to a dispute. However, disclosure is required detailing why the entity feels the disclosures cannot be detailed.
The standard provides examples of circumstances in which a provision is required to be made.
What do accountants need to do?
Be aware of the differences between Section 21 and old GAAP so that they can adequately identify possible adjustments at the date of transition.
Review their client portfolio for clients who have given financial guarantees as further detail will need to be disclosed in the FRS 102 set of financial statements.
What do companies need to do?
Review the provisions in the entity to see if disclosures can be stripped out from the financial statements as a result of the new standard.
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Example 3: Staff retraining as a result of changes in the income tax system..
Example 4: Provision required for a future date.
Example 5: Court case where difficulty assessing whether present obligation exists.
Example 6: reimbursement by a third party.
Example 7: determining most likely outcome where a single obligation
Example 8: Estimating a provision.
Example 9: Present valuing a provision, change in estimate/cash flow and change in discount rate.
Example 12: Onerous supply contract
Example 13: Future operating losses.
Example 14: Closure of a division: no implementation before end of reporting period.
Example 15: Closure of a division: communication and implementation before end of reporting period.
Example 16: Restructuring provision – no formal plan.
Example 17: Contingent liability – remote.
Example 18: Contingent liability – possible.
Example 20: Contingent assets.
Example 21: Financial guarantees.
Example 22: Decommissioning reinstatement costs
Example 23: Reinstatement provision on property which is held on operating lease.
Example 24: Dilapidation requirement
Example 27 – Extract from accounting policy and notes to the financial statements.
Example 28 – Extract from accounting policy and notes to the financial statements.
Example 29 – Extract from notes to the financial statements showing prejudicial disclosure.
Example 30 – Extract from notes to the financial statements.
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Section 21 Provisions and Contingencies Detailed Guide (PDF) (136 downloads )
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FRS 102 35 Part Differences Quick Guide (859 downloads )
FRS 102 35 Part Differences Guide (581 downloads )
FRS 102 Differences on Transition Checklist (1119 downloads )
FRS 102 Differences on Transition Examples Appendix (1092 downloads )
Fillable Differences on Transition Checklist (866 downloads )
Website Links
Difference Guide – Provisions and Contingencies
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Section 21 Disclosure Examples (84 downloads )
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