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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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21.10 Disclosures
21.10.1 Disclosures about provisions
21.10.1.1 Extract from FRS 102 – Section 21.14
21.14 For each class of provision, an entity shall disclose the following:
(a) a reconciliation showing:
(i) the carrying amount at the beginning and end of the period;
(ii) additions during the period, including adjustments that result from changes in measuring the discounted amount;
(iii) amounts charged against the provision during the period; and
(iv) unused amounts reversed during the period;
(b) a brief description of the nature of the obligation and the expected amount and timing of any resulting payments;
(c) an indication of the uncertainties about the amount or timing of those outflows; and
(d) 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.
21.10.1.2 OmniPro comment – Disclosures about Provisioning
See below application of these disclosures. Although the standard states that comparative are not required, these are required under company law. Note the finance cost with regard to the unwinding of the discount is included in the additions line below. With regard to provisions which are not reinstatements, decommissioning in nature, depending on the size of the provisions these may be classed as exceptional items in the P&L where there impact is so material that they distort the true and fair view. These exceptional items may be shown on the face of the P&L or in a note to the P&L depending on the nature and type and what the company defines as exceptional. Where the costs are not deemed exceptional, they are included in operating costs in the profit and loss and possibly disclosed in a note. See Section 5.9A to 5.10B at FRS 102 for further information with regard to the disclosure of exceptional items.
Company law would require provisions to be included as a separate line item in the statement of financial position called ‘Provisions and liabilities’.
21.10.1.2.1 Extract from accounting policy note – Provisions
Example 26: Extract from accounting policy and notes required in financial statements for provisions
Provisions are recognised when the company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount of the obligation can be estimated reliably.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as a finance cost.
The extent a legal or constructive obligation exists, the acquisition costs include the present value of estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to/and or deducted from carrying value of the related asset. To the extent the change results in a negative carrying amount, the difference is recognised in the profit and loss. The change in depreciation is recognised prospectively.
21.10.1.2.2 Remediation provision/environmental provision accounting policies
Or where remediation provisions are required include the below:
Environmental liabilities
Liabilities for environmental costs are recognised when environmental assessments determine clean-ups are probable and the associated costs can be reasonably estimated. Generally the timing of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of active sites. The amount recognised at the balance sheet date is the latest best estimate of the expenditure required.
Discounted liabilities in respect of environmental liabilities and closures costs have been classified between amounts due within one year and due after one year. Provisions for long term obligations are discounted at a rate of X%.
OR where closure costs include the below
Closure costs
All costs associated with the decision to cease trading have been recognised in these financial statements. These include a write down of assets, provisions for expected closure costs together with profit and losses expected to be incurred up to date of cessation of trading.
21.10.1.2.3 Extract from notes to the financial statements – Provisions
| Environmental remediation/closure costs provision | 2015 | 2014 |
| CU | CU | |
| At 1 January | XXXXX | XXXXX |
| Utilised during the year to cover remediation costs | (XXXXX) | (XXXXX) |
| Utilised during the year to cover closure costs | (XXXXX) | (XXXXX) |
| Addition in remediation provision | XXXXXX
|
XXXXXX
|
| Provision carried at 31 December | XXXXX | XXXXX |
| Split as follows: | ||
| Amounts falling due within one year (note X) | XXXXX | XXXXX |
| Amounts falling due after one year (note X) | XXXXX
|
XXXXX
|
| XXXXX | XXXXX |
The company used a hazardous chemical in its production process up to 31 December 200X. As a result of spillages, this chemical has contaminated the soil under and around the company’s former factory. The company commissioned environmental experts who have assessed the damage, developed a program to remediate the damage, and estimated the costs involved. The remediation process is ongoing and proceeding according to an action plan agreed with the relevant authorities.
The directors have reviewed the adequacy of the remediation provision at 31 December 2015. Despite reports received from the environmental experts, the actual remaining term of the remediation programme cannot be assessed with reasonable certainty at this point in time. The company has considered the costs based on a further 10, 20 and 50 year period, weighted by probability to arrive at a provision.
The closure costs associated with the wind up of the company have also been provided for on a basis to match the probable direction of the remediation programme.
Alternative example disclosure for provisions
| Provisions for liabilities | Warranty Provision
|
Redundancy provision | Onerous lease
provision |
| CU | CU | CU | |
| At 1 January | XXXXX | XXXXX | XXXXX |
| Utilised during the year | XXXXX | XXXXX | XXXXX |
| Additions in the year | XXXXX | XXXXX | XXXXX |
| Unused amounts reversed to profit and
loss |
|||
| Capitalised in cost asset | |||
| Exchange adjustment | XXXXX | XXXXX | XXXXX |
| Unwinding of the discount (not required) | XXXX
|
XXXXX
|
XXXXX
|
| XXXXXX | XXXXXX | XXXXXXX |
(i) Maintenance warranty provision
A provision is recognised on warranty claims on products sold during the last 2 years. It is expected the majority of these will be settled in the next year and all will have settled within two years.
(ii) Redundancy provision
During the year the company announced a detailed restructuring plan to cease the production of certain raw materials for its finished product and instead outsource this from the supplier. As a result of this decision, XX staff will have to be made redundant. It is expected these staff will be made redundant in the next financial year.
(iii) Onerous lease
As a result of the decision to cease production, the premises in which this production was carried out is no longer required however the company is contractually committed to continue to lease the premises from the landlord for a further 5 years for which a tenant cannot be secured. As a result an onerous lease provision has been created.
Note to be included where the costs are considered exceptional in nature
| Exceptional item | 2015 | 2014 |
| CU | CU | |
| Employee termination costs | XXXXX | – |
| Inventory write down | XXXXX | – |
| Fixed asset impairment | XXXXX
|
–
|
| XXXXXX | – |
(i) The exceptional item arises from a fundamental restructuring of the company as a result of a decision to cease trading at one of the companys As a result of the decision to cease certain employees are to be made redundant.
21.10.2 Disclosures about contingent liabilities
21.10.2.1 Extract from FRS 102 – Section 21.15
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:
(a) an estimate of its financial effect, measured in accordance with paragraphs 21.7 to 21.11;
(b) an indication of the uncertainties relating to the amount or timing of any outflow; AND
(c) the possibility of any reimbursement.
If it is impracticable to make one or more of these disclosures, that fact shall be stated.
21.10.2.2 OmniPro comment – Contingent liability disclosures
See application of the disclosures detailed in Section 21.15 of FRS 102 below
21.10.2.2.1 Accounting policy disclosure – Contingencies
Example 27 – Extract from accounting policy and notes to the financial statements
Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
Contingencies
A legal action is pending against the company for alleged unfair dismissal. The directors under advisement from their legal team expect that the claim will be successfully defended. Should the company be unsuccessful in the action the maximum estimated settlement is not expected to exceed CU10,000. It is not practicable as yet to state the timing of the any possible payment.
A legal case has been taken against the company, the outcome of which is uncertain. There is a contingent liability in the range of CU0 to CU400,000 in respect of this case. It is not practicable as yet to state the timing of any possible payment.
A customer has commenced a legal action against the company for defective workmanship. The directors under advisement by their legal team believe that it is possible but not probable the action will succeed and therefore no provision has been made in these financial statements. Should the action succeed the estimated liability would be CU100,000.
There is a potential contingent asset/liability in the future in relation to profit commission agreements entered into with various product producers. However in the opinion of the directors it is not practicable to provide an estimate of the financial effect of this contingent asset/liability as it is based on future loss ratios in relation to unsettled claims.
It is not anticipated that any material liabilities will arise from the contingent liabilities other than those provided for.
21.10.3 Disclosures about contingent assets
21.10.3.1 Extract from FRS 102 – Section 21.16
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, when practicable, an estimate of their financial effect, measured using the principles set out in paragraphs 21.7 to 21.11. If it is impracticable to make this disclosure, that fact shall be stated.
21.10.3.2 OmniPro comment
See application of the disclosures at Section 21.16 of FRS 102 below:
21.10.3.2.1 Accounting policy – Contingent assets
Example 28 – Extract from accounting policy and notes to the financial statements
Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
Contingent asset
The company is currently pursuing a compensation claim due to the losses sustained as a result of restrictions placed on the company’s assets by a competitor. The claim arose as a result of the loss of earnings due to restrictions imposed on the usage of these assets. The company won a case in the High Court and were awarded damages of CUXXXX and costs. The defendants have appealed the matter to the Supreme Court and the company awaits a date for the hearing of the claim. The company’s legal advisors are confident that the award of damages and costs to the company will not be overturned.
21.10.4 Prejudicial disclosures
21.10.4.1 Extract from FRS 102 – Section 21.17
21.17 In extremely rare cases, disclosure of some or all of the information required by paragraphs 21.14 to 21.16 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 all of the information required by those paragraphs insofar as it relates to the dispute, but shall disclose at least the following.
In relation to provisions, the following information shall be given:
(a) a table showing the reconciliation required by paragraph 21.14(a) in aggregate including the source and application of any amounts transferred to or from provisions during the reporting period;
(b) particulars of each provision in any case where the amount of the provision is material; and
(c) the fact that, and reason why, the information required by paragraph 21.14 has not been disclosed.
In relation to contingent liabilities, the following information shall be given:
(a) particulars and the total amount of any contingent liabilities (excluding those which arise out of insurance contracts) that are not included in the statement of financial position
(b) the total amount of contingent liabilities which are undertaken on behalf of or for the benefit of:
(i) any parent or fellow subsidiary of the entity;
(ii) any subsidiary of the entity; OR
(iii) any entity in which the reporting entity has a participating interest,shall each be stated separately; and
(c) the fact that, and reason why, the information required by paragraph 21.15 has not been disclosed. In relation to contingent assets, the entity shall disclose the general nature of the dispute, together with the fact that, and reason why, the information required by paragraph 21.16 has not been disclosed.
21.10.4.2 OmniPro comment – Prejudicial disclosures
Section 21.17 of FRS 102 provides an exception to disclosures where such disclosures would be prejudicial to the company. If this is the case, the disclosures in Section 21.17 must be met and details of why the reduced disclosures have been made.
The standard does not elaborate on what is meant by ‘not practicable’ but it is possible to imagine that there may be instances where there are difficulties with estimating the financial effect. It is plausible that this approach may also be used for contingent assets and liabilities. See application of the disclosures at Section 21.17 of FRS 102 below
21.10.4.2.1 Extract from notes to the financial statements showing prejudicial disclosure
Example 29 – Extract from notes to the financial statements showing prejudicial disclosure
A legal action is pending against the company for a claim for personal injuries. The directors under advisement from their legal team expect that the claim will be successfully defended. Any further information usually required by S.21 of FRS 102 is not disclosed, because to do so would seriously prejudice the outcome of the litigation.
21.10.5 Disclosure about financial guarantee contracts
21.10.5.1 Extract from FRS 102 – Section 21.17
21.17A An entity shall disclose the nature and business purpose of the financial guarantee contracts it has issued. If applicable, an entity shall also provide the disclosures required by paragraphs 21.14 and 21.15.
21.10.5.2 OmniPro comment – Financial guarantee contract disclosures
See below an example for such a disclosure assuming the guarantee is not a contingent liability or meets the requirements for a provision.
21.10.5.2.1 Financial guarantee contract example disclosures
Example 30 – Extract from notes to the financial statements
Off-balance sheet arrangements
The company entered into a guarantee with XYZ Bank on behalf of another group company to guarantee the loans in order to allow the subsidiary to expand its operations.
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Examples
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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