ASLB 19 Provisions Contingent
Accounting Standard for Local Bodies (ASLB) 19
Provisions, Contingent Liabilities and
Contingent Assets
Contents
Paragraphs
OBJECTIVE
SCOPE 1–17
Social Benefits 7–11
Other Exclusions from the Scope of the Standard 12–17
DEFINITIONS 18–21
Provisions and other Liabilities 19
Relationship between Provisions and
Contingent Liabilities 20–21
RECOGNITION 22–43
Provisions 22–34
Present Obligation 23–24
Past Event 25–30
Probable Outflow of Resources Embodying
Economic Benefits or Service Potential 31–32
Reliable Estimate of the Obligation 33–34
Contingent Liabilities 35–38
Contingent Assets 39–43
MEASUREMENT 44–62
Best Estimate 44–49
Compendium of ASLBs
Risk and Uncertainties 50–52
Present Value 53–57
Future Events 58–60
Expected Disposals of Assets 61–62
REIMBURSEMENTS 63–68
CHANGES IN PROVISIONS 69–70
USE OF PROVISIONS 71–72
APPLICATION OF THE RECOGNITION AND
MEASUREMENT RULES 73–96
Future Operating Net Deficits 73–75
Onerous Contracts 76–80
Restructuring 81–96
Sale or Transfer of Operations 90–92
Restructuring Provisions 93–96
DISCLOSURE 97–109
TRANSITIONAL PROVISIONS 110
Appendix A—Tables: Provisions, Contingent
Liabilities, Contingent Assets and Reimbursements
Appendix B—Decision Tree
Appendix C—Implementation Guidance
Appendix 1—Comparison with IPSAS 19
Appendix 2—Comparison with Existing AS 29
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Provisions, Contingent Liabilities and Contingent Assets
Accounting Standard for Local Bodies (ASLB) 19
Provisions, Contingent Liabilities and
Contingent Assets
(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of its objective
and the Preface to the Accounting Standards for Local Bodies1)
The Accounting Standard for Local Bodies (ASLB), ‘Provisions, Contingent
Liabilities and Contingent Assets’ issued by the Council of the Institute of
Chartered Accountants of India, will be recommendatory in nature in the initial
years for use by the local bodies. This Standard will be mandatory for Local
Bodies in a State from the date specified in this regard by the State Government
concerned2.
Objective
The objective of this Standard is to define provisions, contingent liabilities and
contingent assets, identify the circumstances in which provisions should be
recognised, how they should be measured and the disclosures that should be
made about them. The Standard also requires that certain information be
disclosed about contingent liabilities and contingent assets in the notes to the
financial statements to enable users to understand their nature, timing and
amount.
Scope
1. An entity which prepares and presents financial statements under
1
Attention is specifically drawn to paragraph 4.2 of the ‘Preface to the Accounting
Standards for Local Bodies’, according to which Accounting Standards are intended to
apply only to items which are material.
2
Reference may be made to the paragraph 7.1 of the ‘Preface to the Accounting
Standards for Local Bodies’ providing the discussion on the compliance with the
Accounting Standards for Local Bodies.
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Compendium of ASLBs
the accrual basis of accounting should apply this Standard in accounting
for provisions, contingent liabilities and contingent assets, except:
(a) Those provisions and contingent liabilities arising from social
benefits of an entity for which it does not receive any
consideration or receives a nominal consideration;
(b) [Refer to appendix 1];
(c) Those resulting from executory contracts, other than where
the contract is onerous subject to other provisions of this
paragraph;
(d) [Refer to Appendix 1];
(e) Those covered by another Accounting Standard for Local
Bodies;
(f) [Refer to Appendix 1];
(g) Those arising from employee benefits except employee
termination benefits that arise as a result of a restructuring as
dealt with in this Standard; and
(h) Those resulting from financial instruments3 that are carried at
fair value.
2. This Standard applies to all entities that are described as the Local
Bodies in the Preface to Accounting Standards for Local Bodies4.
3. [Refer to Appendix 1]
4. This Standard applies to financial instruments (including guarantees) that
are not carried at fair value.
5. [Deleted]
3
A financial Instrument is any contract that gives rise to both a financial asset of one
entity and a financial liability or equity shares of another entity.
4
Refer paragraph 1.3 of the ‘Preface to the Accounting Standards for Local Bodies’.
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Provisions, Contingent Liabilities and Contingent Assets
6. This Standard applies to provisions for restructuring (including discontinuing
operations). Where a restructuring meets the definition of a discontinuing
operation, Guidance for additional disclosures may be drawn from AS 24,
‘Discontinuing Operations’ till the time ASLB on the subject is issued.
Social Benefits
7. For the purposes of this Standard “social benefits” refer to goods, services
and other benefits provided in the pursuit of the social policy objectives of a
local body. These benefits may include:
(a) The delivery of health, education, housing, transport and other
social services etc. in pursuit of social policy objective. In many
cases, beneficiaries of these services are not required to pay
anything or required to pay a nominal amount for these services;
and
(b) Local bodies may make payments of benefits to families, the aged,
the disabled, the unemployed, veterans and others. In other words,
local bodies may provide financial assistance to individuals and
groups in the community to access services to meet their particular
needs, or to supplement their income.
8. In many cases, social benefits arise as a consequence of a commitment
by the Government or Local Body to undertake particular activities on an on-
going basis over the long term in order to provide particular goods and services
to the community. The need for, and nature and supply of, goods and services
to meet social policy will often depend on a range of demographic and social
conditions and are difficult to predict. These benefits generally fall within the
“social protection,” “education” and “health” and may often require an actuarial
assessment to determine the amount of any liability arising in respect of them.
For example, if a local body is providing free health care upto age of 5 years or
subsidized health care to senior citizens over the age of 70, the differential
between the cost of providing the service and the amount recovered against it
will be outside the purview of this standard.
9. The exclusion of these provisions and contingent liabilities from the scope
of this Standard reflects that both (a) the determination of what constitutes the
obligating event, and (b) the measurement of the liability in case of social
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Compendium of ASLBs
benefits require further consideration and, accordingly, will be dealt through a
separate Standard. For example, there are differing views about whether the
obligating event occurs when the individual meets the eligibility criteria for the
benefit or at some earlier stage. To continue the example in para 8, where the
benefit of free health care upto the age of 5 is announced, the determination of
what constitutes an obligating event is difficult. Is it the birth of the child? Or
registration for the benefit? Or registration of birth? Whether the question of the
survival of the children upto the age of 5 is also to be considered?
10. Provisions and contingent liabilities arising from social benefits are
excluded from the scope of this Standard. However, when an entity elects to
recognise a provision for such benefits, the entity discloses the basis on which
the provisions have been recognised and the measurement basis adopted. The
entity also makes other disclosures required by this Standard in respect of
those provisions. ASLB 1, ‘Presentation of Financial Statements’, provides
guidance on dealing with matters not specifically dealt with by another ASLB.
ASLB 1 also includes requirements relating to the selection and disclosure of
accounting policies.
11. In some cases, social benefits may give rise to a liability for which there
is:
(a) Little or no uncertainty as to amount; and
(b) The timing of the obligation is not uncertain.
Accordingly, these are not likely to meet the definition of a provision in this
Standard. Where such liabilities for social benefits exist, they are recognised
where they satisfy the criteria for recognition as liabilities (refer also to paragraph
19). An example would be a period-end accrual for an amount owing to the
existing beneficiaries in respect of aged or disability pensions that have been
approved for payment consistent with the provisions of a contract or legislation.
Other Exclusions from the Scope of the Standard
12. This Standard does not apply to executory contracts unless they are
onerous. Contracts giving rise to social benefits are excluded from the scope of
this Standard.
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Provisions, Contingent Liabilities and Contingent Assets
13. Where another Accounting Standard for Local Bodies deals with a specific
type of provision, contingent liability or contingent asset, an entity applies that
Standard instead of this Standard. For example, certain types of provisions are
also addressed in the Standards on:
(a) Construction contracts (see ASLB 11, ‘Construction Contracts’);
and
(b) Leases (see ASLB 13, ‘Leases’). However, as ASLB 13 contains
no specific requirements to deal with operating leases that have
become onerous, this Standard applies to such cases5.
14. This standard does not apply to provisions arising from employee benefits
(guidance on accounting for employee benefits is found in ASLB 25, ‘Employee
Benefits’6).
15. Some amounts treated as provisions may relate to the recognition of
revenue, for example where an entity gives guarantees in exchange for a fee.
This Standard does not address the recognition of revenue. ASLB 9, ‘Revenue
from Exchange Transactions’, identifies the circumstances in which revenue
from exchange transactions is recognised and provides practical guidance on
the application of the recognition criteria. This Standard does not change the
requirements of ASLB 9.
16. This Standard defines provisions as liabilities of uncertain timing and
amount which can be measured only by using a substantial degree of estimation.
The term ‘provision’ is also used in the context of items such as depreciation,
impairment of assets and doubtful debts: these are adjustments to the carrying
amounts of assets and are not addressed in this Standard.
17. Other Accounting Standards for Local Bodies specify whether expenditures
are treated as assets or as expenses. These issues are not addressed in this
Standard. Accordingly, this Standard neither prohibits nor requires capitalisation
of the costs recognised when a provision is made.
5
This ASLB 13, ‘Leases’ is under formulation.
6
This ASLB 25, ‘Employee Benefits’ is under formulation.
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Compendium of ASLBs
Definitions
18. The following terms are used in this Standard with the meanings
specified:
A constructive obligation is an obligation that derives from an entity’s
actions where:
(a) By an established pattern of past practice, published policies
or a sufficiently specific current statement, the entity has
indicated to other parties that it will accept certain
responsibilities; and
(b) As a result, the entity has created a valid expectation on the
part of those other parties that it will discharge those
responsibilities.
A contingent asset is a possible asset that arises from past events
and whose existence will be confirmed only by the occurrence or
non- occurrence of one or more uncertain future events not wholly
within the control of the entity.
A contingent liability is:
(a) A possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly
within the control of the entity; or
(b) A present obligation that arises from past events but is not
recognised because:
(i) It is not probable that an outflow of resources embodying
economic benefits or service potential will be required to
settle the obligation; or
(ii) The amount of the obligation cannot be measured with
sufficient reliability.
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Provisions, Contingent Liabilities and Contingent Assets
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.
A legal obligation is an obligation that derives from:
(a) A contract (through its explicit or implicit terms);
(b) Legislation; or
(c) Other operation of law.
Liabilities are present obligations of the entity arising from past
events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits or service
potential.
An obligating event is an event that creates a legal or constructive
obligation that results in an entity having no realistic alternative to
settling that obligation.
An onerous contract is a contract for the exchange of assets or
services in which the unavoidable costs of meeting the obligations
under the contract exceed the economic benefits or service potential
expected to be received under it.
Present obligation an obligation is a present obligation if, based on
the evidence available, its existence at the balance sheet date is
considered probable, i.e., more likely than not.
Possible obligation an obligation is a possible obligation if, based
on the evidence available, its existence at the balance sheet date is
considered not probable.
A provision is a liability of uncertain timing or amount.
A restructuring is a programme that is planned and controlled by
management, and materially changes either:
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Compendium of ASLBs
(a) The scope of an entity’s activities; or
(b) The manner in which those activities are carried out.
Provisions and Other Liabilities
19. Provisions can be distinguished from other liabilities such as payables
and accruals because there is uncertainty about the timing or amount of the
future expenditure required in settlement. By contrast:
(a) Payables are liabilities to pay for goods or services that have been
received or supplied, and have been invoiced or formally agreed
with the supplier (and include payments in respect of social benefits
where formal agreements for specified amounts exist); and
(b) Accruals are liabilities to pay for goods or services that have been
received or supplied, but have not been paid, invoiced, or formally
agreed with the supplier, including amounts due to employees (for
example, amounts relating to accrued leave encashment). Although
it is sometimes necessary to estimate the amount or timing of
accruals, the uncertainty is generally much less than for provisions.
Accruals are often reported as part of accounts payable, whereas provisions are
reported separately.
Relationship between Provisions and Contingent Liabilities
20. In a general sense, all provisions are contingent because they are
uncertain in timing or amount. However, within this Standard, the term contingent
is used for liabilities and assets that are not recognised because their existence
will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity. In addition, the
term contingent liability is used for liabilities that do not meet the recognition
criteria.
21. This Standard distinguishes between:
(a) Provisions—which are recognised as liabilities (assuming that a
reliable estimate can be made) because they are present obligations
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Provisions, Contingent Liabilities and Contingent Assets
and it is probable that an outflow of resources embodying economic
benefits or service potential will be required to settle the obligations;
and
(b) Contingent liabilities—which are not recognised as liabilities
because they are either:
(i) Possible obligations, as it has yet to be confirmed whether
the entity has a present obligation that could lead to an outflow
of resources embodying economic benefits or service
potential; or
(ii) Present obligations that do not meet the recognition criteria
in this Standard (because either it is not probable that an
outflow of resources embodying economic benefits or service
potential will be required to settle the obligation, or a
sufficiently reliable estimate of the amount of the obligation
cannot be made).
Recognition
Provisions
22. A provision should be recognised when:
(a) An entity has a present obligation (legal or constructive) as a
result of a past event;
(b) It is probable that an outflow of resources embodying economic
benefits or service potential will be required to settle the
obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
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Compendium of ASLBs
Present Obligation
23. In some cases, it is not clear whether there is a present obligation.
In these cases, a past event is deemed to give rise to a present obligation
if, taking account of all available evidence, it is more likely than not that a
present obligation exists at the reporting date.
24. In most cases, it will be clear whether a past event has given rise to a
present obligation. In other cases, for example in a lawsuit, it may be disputed
either whether certain events have occurred or whether those events result in a
present obligation. In such cases, an entity determines whether a present
obligation exists at the reporting date by taking account of all available evidence,
including, for example, the opinion of experts. The evidence considered includes
any additional evidence provided by events after the reporting date. On the
basis of such evidence:
(a) Where it is more likely than not that a present obligation exists at the
reporting date, the entity recognises a provision (if the recognition
criteria are met); and
(b) Where it is more likely that no present obligation exists at the reporting
date, the entity discloses a contingent liability, unless the possibility
of an outflow of resources embodying economic benefits or service
potential is remote (see paragraph 100).
Past Event
25. A past event that leads to a present obligation is called an obligating
event. For an event to be an obligating event, it is necessary that the entity has
no realistic alternative to settling the obligation created by the event. This is the
case only:
(a) Where the settlement of the obligation can be enforced by law; or
(b) In the case of a constructive obligation, where the event (which
may be an action of the entity) creates valid expectations in other
parties that the entity will discharge the obligation.
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Provisions, Contingent Liabilities and Contingent Assets
26. Financial statements deal with the financial position of an entity at the
end of its reporting period and not its possible position in the future. Therefore,
no provision is recognised for costs that need to be incurred to continue an
entity’s ongoing activities in the future. The only liabilities recognised in an
entity’s balance sheet are those that exist at the reporting date.
27. It is only those obligations arising from past events existing independently
of an entity’s future actions (that is, the future conduct of its activities) that are
recognised as provisions. Examples of such obligations are penalties or clean-
up costs for unlawful environmental damage imposed by legislation on an entity.
Both of these obligations would lead to an outflow of resources embodying
economic benefits or service potential in settlement regardless of the future
actions of that entity. Similarly, an entity would recognise a provision for the
decommissioning costs of sewage treatment plant, to the extent that the entity
is obliged to rectify damage already caused. ASLB 17, ‘ Property, Plant and
Equipment’, deals with items, including dismantling and site restoring costs, that
are included in the cost of an asset. In contrast, because of legal requirements,
pressure from constituents, or a desire to demonstrate community leadership,
an entity may intend or need to carry out expenditure to operate in a particular
way in the future. An example would be where an entity decides to fit emission
controls on certain of its vehicles, or a local body owned laboratory decides to
install extraction units to protect employees from the fumes of certain chemicals.
Because the entities can avoid the future expenditure by their future actions —
for example, by changing their method of operation, they have no present
obligation for that future expenditure, and no provision is recognised.
28. An obligation always involves another party to whom the obligation is
owed. It is not necessary, however, to know the identity of the party to whom the
obligation is owed — indeed the obligation may be to the public at large. Because
an obligation always involves a commitment to another party, it follows that a
decision by an entity’s management, governing body, or controlling entity does
not give rise to a constructive obligation at the reporting date, unless the decision
has been communicated before the reporting date to those affected by it in a
sufficiently specific manner to raise a valid expectation in them that the entity
will discharge its responsibilities.
29. An event that does not give rise to an obligation immediately may do so
at a later date, because of changes in the law or because an act (for example, a
sufficiently specific public statement) by the entity gives rise to a constructive
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Compendium of ASLBs
obligation. For example, when environmental damage is caused by a local body
agency, there may be no obligation to remedy the consequences. However, the
causing of the damage will become an obligating event when a new law requires
the existing damage to be rectified, or when the controlling local body or the
individual agency publicly accepts responsibility for rectification in a way that
creates a constructive obligation.
30. Where details of a proposed new law have yet to be finalised, an obligation
arises only when the legislation is virtually certain to be enacted as drafted. For
the purpose of this Standard, such an obligation is treated as a legal obligation.
However, differences in circumstances surrounding enactment often make it
impossible to specify a single event that would make the enactment of a law
virtually certain. In many cases, it is not possible to judge whether a proposed
new law is virtually certain to be enacted as drafted, and any decision about the
existence of an obligation should await the enactment of the proposed law.
Probable Outflow of Resources Embodying Economic Benefits
or Service Potential
31. For a liability to qualify for recognition, there must be not only a present
obligation but also the probability of an outflow of resources embodying economic
benefits or service potential to settle that obligation. For the purpose of this
Standard, an outflow of resources or other event is regarded as probable if the
event is more likely than not to occur, that is, the probability that the event will
occur is greater than the probability that it will not. Where it is not probable that
a present obligation exists, an entity discloses a contingent liability, unless the
possibility of an outflow of resources embodying economic benefits or service
potential is remote (see paragraph 100).
32. Where there are a number of similar obligations (for example, a local
body’s obligation to compensate individuals who have received contaminated
blood from a hospital owned by the local body), the probability that an outflow
will be required in settlement is determined by considering the class of obligations
as a whole. Although the likelihood of outflow for any one item may be small, it
may well be probable that some outflow of resources will be needed to settle
the class of obligations as a whole. If that is the case, a provision is recognised
(if the other recognition criteria are met).
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Provisions, Contingent Liabilities and Contingent Assets
Reliable Estimate of the Obligation
33. The use of estimates is an essential part of the preparation of financial
statements, and does not undermine their reliability. This is especially true in
the case of provisions, which by their nature are more uncertain than most other
assets or liabilities. Except in extremely rare cases, an entity will be able to
determine a range of possible outcomes, and can therefore make an estimate
of the obligation that is sufficiently reliable to use in recognising a provision.
34. In the extremely rare case where no reliable estimate can be made, a
liability exists that cannot be recognised. That liability is disclosed as a contingent
liability (see paragraph 100).
Contingent Liabilities
35. An entity should not recognise a contingent liability.
36. A contingent liability is disclosed, as required by paragraph 100, unless
the possibility of an outflow of resources embodying economic benefits or service
potential is remote.
37. Where 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. For example, in the case of joint venture debt, that part of the obligation
that is to be met by other joint venture participants is treated as a contingent
liability. The entity recognises a provision for the part of the obligation for which
an outflow of resources embodying economic benefits or service potential is
probable, except in the rare circumstances where no reliable estimate can be
made.
38. Contingent liabilities may develop in a way not initially expected. Therefore,
they are assessed continually to determine whether an outflow of resources
embodying economic benefits or service potential has become probable. If it
becomes probable that an outflow of future economic benefits or service potential
will be required for an item previously dealt with as a contingent liability, a
provision is recognised in the financial statements of the period in which the
change in probability occurs (except in the extremely rare circumstances where
no reliable estimate can be made). For example, an entity may have breached
an environmental law, but it remains unclear whether any damage was caused
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Compendium of ASLBs
to the environment. Where, subsequently it becomes clear that damage was
caused and remediation will be required, the entity would recognise a provision
because an outflow of economic benefits is now probable.
Contingent Assets
39. An entity should not recognise a contingent asset.
40. Contingent assets usually arise from unplanned or other unexpected events
that (a) are not wholly within the control of the entity, and (b) give rise to the
possibility of an inflow of economic benefits or service potential to the entity. An
example is a claim that an entity is pursuing through legal processes, where the
outcome is uncertain.
41. Contingent assets are not recognised in financial statements, since this
may result in the recognition of revenue that may never be realised. However,
when the realisation of revenue is virtually certain, then the related asset is not
a contingent asset and its recognition is appropriate.
42. A contingent asset is disclosed, as required by paragraph 105, where an
inflow of economic benefits or service potential is probable.
43. Contingent assets are assessed continually to ensure that developments
are appropriately reflected in the financial statements. If it has become virtually
certain that an inflow of economic benefits or service potential will arise and the
asset’s value can be measured reliably, the asset and the related revenue are
recognised in the financial statements of the period in which the change occurs.
If an inflow of economic benefits or service potential has become probable, an
entity discloses the contingent asset (see paragraph 105).
Measurement
Best Estimate
44. The amount recognised as a provision should be the best estimate
of the expenditure required to settle the present obligation at the reporting
date.
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Provisions, Contingent Liabilities and Contingent Assets
45. The best estimate of the expenditure required to settle the present
obligation is the amount that an entity would rationally pay to settle the obligation
at the reporting date or to transfer it to a third party at that time. It will often be
impossible or prohibitively expensive to settle or transfer an obligation at the
reporting date. However, the estimate of the amount that an entity would rationally
pay to settle or transfer the obligation gives the best estimate of the expenditure
required to settle the present obligation at the reporting date.
46. The estimates of outcome and financial effect are determined by the
judgment of the management of the entity, supplemented by experience of
similar transactions and, in some cases, reports from independent experts. The
evidence considered includes any additional evidence provided by events after
the reporting date.
47. [Refer to Appendix 1]
48. [Refer to Appendix 1]
49. [Refer to Appendix 1]
Risks and Uncertainties
50. The risks and uncertainties that inevitably surround many events
and circumstances should be taken into account in reaching the best
estimate of a provision.
51. Risk describes variability of outcome. A risk adjustment may increase the
amount at which a liability is measured. Caution is needed in making judgments
under conditions of uncertainty, so that revenue or assets are not overstated
and expenses or liabilities are not understated. However, uncertainty does not
justify the creation of excessive provisions or a deliberate overstatement of
liabilities. For example, if the projected costs of a particularly adverse outcome
are estimated on a prudent basis, that outcome is not then deliberately treated
as more probable than is realistically the case. Care is needed to avoid duplicating
adjustments for risk and uncertainty with consequent overstatement of a provision.
52. Disclosure of the uncertainties surrounding the amount of the expenditure
is made under paragraph 98(b).
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Compendium of ASLBs
53-57. [Refer to Appendix 1]
Future Events
58. Future events that may affect the amount required to settle an
obligation should be reflected in the amount of a provision where there is
sufficient objective evidence that they will occur.
59. Expected future events may be particularly important in measuring
provisions. For example, certain obligations may be index linked to compensate
recipients for the effects of inflation or other specific price changes. If there is
sufficient evidence of likely expected rates of inflation, this should be reflected
in the amount of the provision. Another example of future events affecting the
amount of a provision is where a local body believes that the cost of cleaning up
the tar, ash, and other pollutants associated with a gasworks site at the end of
its life will be reduced by future changes in technology. In this case, the amount
recognised reflects the cost that technically qualified, objective observers
reasonably expect to be incurred, taking account of all available evidence as to
the technology that will be available at the time of the clean-up. Thus, it is
appropriate to include, for example, expected cost reductions associated with
increased experience in applying existing technology, or the expected cost of
applying existing technology to a larger or more complex clean-up operation
than has previously been carried out. However, an entity does not anticipate the
development of a completely new technology for cleaning up unless it is supported
by sufficient objective evidence.
60. The effect of possible new legislation which may affect the amount of an
existing obligation of an entity is taken into consideration in measuring that
obligation, when sufficient objective evidence exists that the legislation is virtually
certain to be enacted. The variety of circumstances that arise in practice makes
it impossible to specify a single event that will provide sufficient, objective
evidence in every case. Evidence is required both (a) of what legislation will
demand, and (b) of whether it is virtually certain to be enacted and implemented
in due course. In many cases, sufficient objective evidence will not exist until
the new legislation is enacted.
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Provisions, Contingent Liabilities and Contingent Assets
Expected Disposal of Assets
61. Gains from the expected disposal of assets should not be taken into
account in measuring a provision.
62. Gains on the expected disposal of assets are not taken into account in
measuring a provision, even if the expected disposal is closely linked to the
event giving rise to the provision. Instead, an entity recognises gains on expected
disposals of assets at the time specified by the Accounting Standard for Local
Bodies (ASLBs) dealing with the assets concerned.
Reimbursements
63. Where some or all of the expenditure required to settle a provision
is expected to be reimbursed by another party, the reimbursement should
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. The amount
recognised for the reimbursement should not exceed the amount of the
provision.
64. In the statement of income and expenditure, the expense relating to
a provision may be presented net of the amount recognised for a
reimbursement.
65. Sometimes, an entity is able to look to another party to pay part or all of
the expenditure required to settle a provision (for example, through insurance
contracts, indemnity clauses, or suppliers’ warranties). The other party may
either reimburse amounts paid by the entity, or pay the amounts directly. For
example, an entity may have legal liability to an individual as a result of misleading
advice provided by its employees. However, the entity may be able to recover
some of the expenditure from professional indemnity insurance.
66. In most cases, the entity will remain liable for the whole of the amount in
question, so that the entity would have to settle the full amount if the third party
failed to pay for any reason. In this situation, a provision is recognised for the
full amount of the liability, and a separate asset for the expected reimbursement
is recognised when it is virtually certain that reimbursement will be received if
the entity settles the liability.
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Compendium of ASLBs
67. In some cases, the entity will not be liable for the costs in question if the
third party fails to pay. In such a case, the entity has no liability for those costs,
and they are not included in the provision.
68. As noted in paragraph 37, an obligation for which an entity is jointly and
severally liable is a contingent liability, to the extent that it is expected that the
obligation will be settled by the other parties.
Changes in Provisions
69. Provisions should be reviewed at each reporting date, and adjusted
to reflect the current best estimate. If it is no longer probable that an
outflow of resources embodying economic benefits or service potential
will be required to settle the obligation, the provision should be reversed.
70. [Refer to Appendix 1]
Use of Provisions
71. A provision should be used only for expenditures for which the
provision was originally recognised.
72. Only expenditures that relate to the original provision are set against it.
Setting expenditures against a provision that was originally recognised for another
purpose would conceal the impact of two different events.
Application of the Recognition and Measurement
Rules
Future Operating Net Deficits
73. Provisions should not be recognised for net deficits from future
operating activities.
74. Net deficits from future operating activities do not meet the definition of
liabilities in paragraph 18 and the general recognition criteria set out for provisions
in paragraph 22.
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Provisions, Contingent Liabilities and Contingent Assets
75. An expectation of net deficits from future operating activities is an indication
that certain assets used in these activities may be impaired. An entity tests
these assets for impairment. Guidance on accounting for impairment is found in
ASLB 21, ‘Impairment of Non-Cash-Generating Assets’ or ASLB 26, ‘Impairment
of Cash-Generating Assets’7, as appropriate.
Onerous Contracts
76. If an entity has a contract that is onerous, the present obligation (net
of recoveries) under the contract should be recognised and measured as a
provision.
77. Paragraph 76 of this Standard applies only to contracts that are onerous.
Contracts of social benefits are excluded from the scope of this Standard.
78. Many contracts evidencing exchange transactions (for example, some
routine purchase orders) can be canceled without paying compensation to the
other party, and therefore there is no obligation. Other contracts establish both
rights and obligations for each of the contracting parties. Where events make
such a contract onerous, the contract falls within the scope of this Standard,
and a liability exists which is recognised. Executory contracts that are not onerous
fall outside the scope of this Standard.
79. This Standard defines an onerous contract as a contract in which the
unavoidable costs of meeting the obligations under the contract exceed the
economic benefits or service potential expected to be received under it, which
includes amounts recoverable. Therefore, it is the present obligation net of
recoveries that is recognised as a provision under paragraph 76. The unavoidable
costs under a contract reflect the least net cost of exiting from the contract,
which is the lower of the cost of fulfilling it and any compensation or penalties
arising from failure to fulfill it.
80. Before a separate provision for an onerous contract is established, an
entity recognises any impairment loss as per ASLB 17, ‘Property, Plant and
Equipment’, that has occurred on assets dedicated to that contract.
7
These ASLBs are under formulation.
239
Compendium of ASLBs
Restructuring
81. The following are examples of events that may fall under the definition of
restructuring:
(a) Termination or disposal of an activity or service;
(b) The closure of a ward office or termination of activities of a local
body’s department or the relocation of activities from one place to
another with in the jurisdiction of that local body;
(c) [Refer to Appendix 1];
(d) Fundamental reorganizations that have a material effect on the
nature and focus of the entity’s operations.
82. A provision for restructuring costs is recognised only when the general
recognition criteria for provisions set out in paragraph 22 are met. Paragraphs
83 to 96 set out how the general recognition criteria apply to restructurings.
83. A constructive obligation to restructure arises only when an entity:
(a) Has a detailed formal plan for the restructuring identifying at
least:
(i) The activity/operating unit or part of an activity/operating
unit concerned;
(ii) The principal locations affected;
(iii) The location, function, and approximate number of
employees who will be compensated for terminating their
services;
(iv) The expenditures that will be undertaken; and
(v) When the plan will be implemented; and
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Provisions, Contingent Liabilities and Contingent Assets
(b) Has raised a valid expectation in those affected that it will
carry out the restructuring by starting to implement that plan
or announcing its main features to those affected by it.
84. Within the local body, restructuring may occur at local body level, or it’s
department level.
85. Evidence that a local body has started to implement a restructuring plan
would be provided, for example, by (a) the public announcement of the main
features of the plan, (b) the sale or transfer of assets, (c) notification of intention
to cancel leases, or (d) the establishment of alternative arrangements for clients
of services. A public announcement of a detailed plan to restructure constitutes
a constructive obligation to restructure only if it is made in such a way and in
sufficient detail (that is, setting out the main features of the plan) that it gives
rise to valid expectations in other parties, such as users of the service, suppliers,
and employees (or their representatives) that the local body will carry out the
restructuring.
86. For a plan to be sufficient to give rise to a constructive obligation when
communicated to those affected by it, its implementation needs to be planned to
begin as soon as possible, and to be completed in a timeframe that makes
significant changes to the plan unlikely. If it is expected that there will be a long
delay before the restructuring begins, or that the restructuring will take an
unreasonably long time, it is unlikely that the plan will raise a valid expectation
on the part of others that the local body is at present committed to restructuring,
because the timeframe allows opportunities for the local body to change its
plans.
87. A decision by management or the governing body to restructure, taken
before the reporting date, does not give rise to a constructive obligation at the
reporting date unless the entity has, before the reporting date:
(a) Started to implement the restructuring plan; or
(b) Announced the main features of the restructuring plan to those
affected by it in a sufficiently specific manner to raise a valid
expectation in them that the entity will carry out the restructuring.
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Compendium of ASLBs
If an entity starts to implement a restructuring plan, or announces its main
features to those affected, only after the reporting date, disclosure may be
required under ASLB 14, ‘Events after the Reporting Date’, if the restructuring is
material and non-disclosure could influence the economic decisions of users
taken on the financial statements.
88. Although a constructive obligation is not created solely by a management
or governing body decision, an obligation may result from other earlier events
together with such a decision. For example, negotiations with employee
representatives for termination payments, or with purchasers for the sale or
transfer of an operation, may have been concluded subject only to governing
body or board approval. Once that approval has been obtained and
communicated to the other parties, the entity has a constructive obligation to
restructure, if the conditions of paragraph 83 are met.
89. In some cases, (a) the ultimate authority for making decisions about an
entity is vested in a governing body or board whose membership includes
representatives of interests other than those of management (for
example, employees), or (b) notification to these representatives may be
necessary before the governing body or – competent authority’s decision is
taken. Because a decision by such a governing body or competent authority
involves communication to these representatives, it may result in a constructive
obligation to restructure.
Sale or Transfer of Operations
90. No obligation arises as a consequence of the sale or transfer of an
operation until the entity is committed to the sale or transfer, that is, there
is a binding agreement.
91. Even when an entity has taken a decision to sell an operation and
announced that decision publicly, it cannot be committed to the sale until a
purchaser has been identified and there is a binding sale agreement. Until there
is a binding sale agreement, the entity will be able to change its mind, and
indeed will have to take another course of action if a purchaser cannot be found
on acceptable terms. When a sale is only part of a restructuring, a constructive
obligation can arise for the other parts of the restructuring before a binding sale
agreement exists.
242
Provisions, Contingent Liabilities and Contingent Assets
92. Restructuring within a local body often involves the transfer of operations
from one controlled entity to another, and may involve the transfer of operations
at no or nominal consideration. Such transfers will often take place under a
government or directive of competent authority, and will not involve binding
agreements as described in paragraph 90. An obligation exists only when there
is a binding transfer agreement. Even where proposed transfers do not lead to
the recognition of a provision, the planned transaction may require disclosure
under other ASLBs, such as the ASLB 14, Events after the Reporting Date, and
ASLB 20, ‘Related Party Disclosures’8.
Restructuring Provisions
93. A restructuring provision should include only the direct expenditures
arising from the restructuring, which are those that are both:
(a) Necessarily entailed by the restructuring; and
(b) Not associated with the ongoing activities of the entity.
94. A restructuring provision does not include such costs as:
(a) Retraining or relocating continuing staff; or
(b) Investment in new systems and distribution networks.
These expenditures relate to the future conduct of an activity, and are not
liabilities for restructuring at the reporting date. Such expenditures are recognised
on the same basis as if they arose independently of a restructuring.
95. Identifiable future operating net deficits up to the date of a restructuring
are not included in a provision, unless they relate to an onerous contract, as
defined in paragraph 18.
96. As required by paragraph 61, gains on the expected disposal of assets
are not taken into account in measuring a restructuring provision, even if the
sale of assets is envisaged as part of the restructuring.
8
The formulation of the ASLB is under formulation.
243
Compendium of ASLBs
Disclosure
97. For each class of provision, an entity should disclose:
(a) The carrying amount at the beginning and end of the period;
(b) Additional provisions made in the period, including increases
to existing provisions;
(c) Amounts used (that is, incurred and charged against the
provision) during the period;
(d) Unused amounts reversed during the period; and
(e) [Refer to Appendix 1]
Comparative information is not required.
98. An entity should disclose the following for each class of provision:
(a) A brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic benefits
or service potential;
(b) An indication of the uncertainties about the amount or timing
of those outflows. Where necessary to provide adequate
information, an entity should disclose the major assumptions
made concerning future events, as addressed in paragraph
58; and
(c) The amount of any expected reimbursement, stating the amount
of any asset that has been recognised for that expected
reimbursement.
99. Where an entity elects to recognise in its financial statements
provisions for social obligations of an entity, it should make the disclosures
required in paragraphs 97 and 98 in respect of those provisions.
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Provisions, Contingent Liabilities and Contingent Assets
100. Unless the possibility of any outflow in settlement is remote, an
entity should disclose, for each class of contingent liability at the reporting
date, a brief description of the nature of the contingent liability and, where
practicable:
(a) An estimate of its financial effect, measured under paragraphs
44 to 62;
(b) An indication of the uncertainties relating to the amount or
timing of any outflow; and
(c) The possibility of any reimbursement.
101. In determining which provisions or contingent liabilities may be aggregated
to form a class, it is necessary to consider whether the nature of the items is
sufficiently similar for a single statement about them to fulfill the requirements of
paragraphs 98(a) and (b) and 100(a) and (b). Thus, it may be appropriate to
treat, as a single class of provision, amounts relating to one type of obligation,
but it would not be appropriate to treat, as a single class, amounts relating to
environmental restoration costs and amounts that are subject to legal
proceedings.
102. Where a provision and a contingent liability arise from the same set of
circumstances, an entity makes the disclosures required by paragraphs 97, 98
and 100 in a way that shows the link between the provision and the contingent
liability.
103. An entity may in certain circumstances use external valuation to measure
a provision. In such cases, information relating to the valuation can usefully be
disclosed.
104. The disclosure requirements in paragraph 100 do not apply to contingent
liabilities that arise from social benefits of an entity (see paragraphs 1(a) and 7–
11 for a discussion of the exclusion of social benefits from this Standard).
105. Where an inflow of economic benefits or service potential is probable,
an entity should disclose a brief description of the nature of the contingent
assets at the reporting date, and, where practicable, an estimate of their
financial effect, measured using the principles set out for provisions in
paragraphs 44 to 62.
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Compendium of ASLBs
106. The disclosure requirements in paragraph 105 are only intended to apply
to those contingent assets where there is a reasonable expectation that benefits
will flow to the entity. That is, there is no requirement to disclose this information
about all contingent assets (see paragraphs 39 to 43 for a discussion of contingent
assets). It is important that disclosures for contingent assets avoid giving
misleading indications of the likelihood of revenue arising. The contingent asset
should be quantified, where a reasonable estimate of the same can be made.
107. The disclosure requirements in paragraph 105 encompass contingent
assets from both exchange and non-exchange transactions. Whether a contingent
asset exists in relation to taxation revenues rests on the interpretation of what
constitutes a taxable event. The determination of the taxable event for taxation
revenue and its possible implications for the disclosure of contingent assets
related to taxation revenues are to be dealt with as a part of a separate project
on non-exchange revenue.
108. Where any of the information required by paragraphs 100 and 105 is
not disclosed because it is not practicable to do so, that fact should be
stated.
109. In extremely rare cases, disclosure of some or all of the information
required by paragraphs 97 to 107 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 should disclose the
general nature of the dispute, together with the fact that, and reason why,
the information has not been disclosed.
Transitional Provisions
110. The effect of adopting this Standard on its effective date (or earlier)
should be reported as an adjustment to the opening balance of accumulated
surpluses/(deficits) for the period in which the Standard is first adopted.
111-112. [Refer to Appendix 1]
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Provisions, Contingent Liabilities and Contingent Assets
Appendix A
Provisions, Contingent Liabilities, Contingent Assets, and
Reimbursements
These Tables accompany, but are not part of ASLB 19.
Provisions and Contingent Liabilities
Where, as a result of past events, there may be an outflow of resources
embodying future economic benefits or service potential in settlement of
(a) a present obligation, or (b) a possible obligation whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
There is a present There is a possible There is a possible
obligation that obligation or a present obligation or a present
probably requires obligation that may, but obligation where the
anoutflow of probably will not, likelihood of an outflow
resources. require an outflow of of resources is remote.
resources.
A provision is No provision is No provision is
recognised (paragraph recognised (paragraph Recognised (paragraph
22). 35). 35).
Disclosures are Disclosures are required No disclosure is required
required for the for the contingent liability (paragraph 100).
provision (paragraphs (paragraph 100).
97 and 98).
A contingent liability also arises in the extremely rare case where there is a
liability that cannot be recognised because it cannot be measured reliably.
Disclosures are required for the contingent liability.
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Compendium of ASLBs
Contingent Assets
Where, as a result of past events, there is a possible asset whose
existence will be confirmed only by the occurrence or non-occurrence of
one or more uncertain future events not wholly within the control of the
entity.
The inflow of economic The inflow of economic The inflow of economic
benefits or service benefits or service benefits or service
potential is virtually potential is probable, potential is not
certain. but not virtually certain. probable.
The asset is not No asset is recognised No asset is recognised
contingent (paragraph (paragraph 39). (paragraph 39).
41).
Disclosures are required No disclosure is required
(paragraph 105). (paragraph 105).
Reimbursements
Some or all of the expenditure required to settle a provision is expected
to be reimbursed by another party.
The entity has no The obligation for the The obligation for the
obligation for the part amount expected to be amount expected to be
of the expenditure to be reimbursed remains reimbursed remains
reimbursed by the other with the entity, and it is with the entity, and
party. virtually certain that the reimbursement is
reimbursement will not virtually certain if
bereceived if the entity the entity settles the
settles the provision. provision.
The entity has no liability The reimbursement is The expected
for the amount to be recognised as a separate reimbursement is not
reimbursed (paragraph asset in the balance recognised as an asset
67). sheet, and may be offset (paragraph 63).
against the expense in
the income and
expenditure statement.
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Provisions, Contingent Liabilities and Contingent Assets
The amount recognised
for the expected
reimbursement does not
exceed the liability
(paragraphs 63 and 64).
No disclosure is required. The reimbursement is The expected
disclosed, together with reimbursement is
the amount recognised for disclosed (paragraph
the reimbursement 98(c)).
(paragraph 98(c)).
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Compendium of ASLBs
Appendix B
Illustrative Decision Tree
This decision tree accompanies, but is not part of ASLB 19.
Note: In some cases, it is not clear whether there is a present obligation. In
these cases, a past event is deemed to give rise to a present obligation if,
taking account of all available evidence, it is more likely than not that a present
obligation exists at the reporting date (paragraph 23 of this Standard).
Possible
Obligation?
Probable Outflow?
Remote?
Reliable estimate?
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Provisions, Contingent Liabilities and Contingent Assets
Appendix C
Implementation Guidance
This guidance accompanies, but is not part of, ASLB 19.
Recognition
IG1. All the entities in the examples have a reporting date of March 31. In all
cases, it is assumed that a reliable estimate can be made of any outflows
expected. In some examples, the circumstances described may have resulted
in impairment of the assets – this aspect is not dealt with in the examples.
IG2. The cross-references provided in the examples indicate paragraphs of
this Standard that are particularly relevant. This guidance should be read in the
context of the full text of this Standard.
IG3. [Refer to Appendix 1]
IG4. [Refer to Appendix 1]
Contaminated Land—Legislation Virtually Certain to be Enacted
IG5. A local body owns a warehouse on land near a port. The local body has
retained ownership of the land because it may require the land for future
expansion of its operations. For the past ten years, the property had been
leased out to a group of farmers as a storage facility for agricultural chemicals.
The government announces its intention to enact environmental legislation
requiring property owners to accept liability for environmental pollution, including
the cost of cleaning-up contaminated land. As a result, the local body introduces
a hazardous chemical policy and begins applying the policy to its activities and
properties. At this stage it becomes apparent that the agricultural chemicals
have contaminated the land surrounding the warehouse. The local body has no
recourse against the farmers or its insurance company for the clean-up costs.
At March 31, 2013 it is virtually certain that a draft law requiring a clean-up of
land already contaminated will be enacted shortly after the year end.
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Compendium of ASLBs
Analysis
Present obligation as a result of a past obligating event – The obligating event is
the contamination of the land because of the virtual certainty of legislation
requiring the clean-up.
An outflow of resources embodying economic benefits or service potential in
settlement – Probable.
Conclusion
A provision is recognised for the best estimate of the costs of the clean-up (see
paragraphs 22 and 30).
Contamination and Constructive Obligation
IG6. A local body has a widely published environmental policy in which it
undertakes to clean up all contamination that it causes. The local body has a
record of honoring this published policy. There is no environmental legislation in
place in the jurisdiction. During the course of travelling, an oil tanker vessel
carrying oil is damaged and leaks a substantial amount of oil. The local body
agrees to pay for the costs of the immediate clean-up.
Analysis
Present obligation as a result of a past obligating event – The obligating event is
the contamination of the environment, which gives rise to a constructive obligation
because the policy and previous conduct of the local body has created a valid
expectation that the local body will clean up the contamination.
An outflow of resources embodying economic benefits or service potential in
settlement – Probable.
Conclusion
A provision is recognised for the best estimate of the costs of the clean-up (see
paragraphs 22 and 30).
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Provisions, Contingent Liabilities and Contingent Assets
Gravel Quarry
IG7. A local body operates a gravel quarry on land that it leases on a
commercial basis from a private sector company. The gravel is used for the
construction and maintenance of roads. The agreement with the landowners
requires the local body to restore the quarry site by removing all buildings,
reshaping the land, and replacing all topsoil. 60% of the eventual restoration
costs relate to the removal of the quarry buildings and restoration of the site,
and 40% arise through the extraction of gravel. At the reporting date, the quarry
buildings have been constructed, and excavation of the site has begun but no
gravel has been extracted.
Analysis
Present obligation as a result of a past obligating event – The construction of
buildings and the excavation of the quarry creates a legal obligation under the
terms of the agreement to remove the buildings and restore the site, and is thus
an obligating event. At the reporting date, however, there is no obligation to
rectify the damage that will be caused by extraction of the gravel.
An outflow of resources embodying economic benefits or service potential in
settlement – Probable.
Conclusion
A provision is recognised for the best estimate of 60% of the eventual costs that
relate to the removal of the buildings and restoration of the site (see paragraph
22). These costs are included as part of the cost of the quarry. The 40% of
costs that arise through the extraction of gravel are recognised as a liability
progressively when the gravel is extracted.
IG8. [Refer to Appendix 1]
Discontinuation of an operation/service—No Implementation before
Reporting Date
IG9. On 12 December 2012, a local body decides to discontinue the collection
of octroi in a particular area within its jurisdiction which is collected through a
contractor. The decision was not communicated to the contractor and others
253
Compendium of ASLBs
who are affected before the reporting date (March 31, 2013), and no other steps
were taken to implement the decision.
Analysis
Present obligation as a result of a past obligating event – There has been no
obligating event and so there is no obligation.
Conclusion
No provision is recognised (see paragraphs 22 and 83).
Outsourcing of a Division—Implementation Before the Reporting Date
IG10.On December 12, 2012, a local body decided to outsource a division of a
local body department. On December 20, 2012, a detailed plan for outsourcing
the division was agreed by the local body, and redundancy notices were sent to
the staff of the division.
Analysis
Present obligation as a result of a past obligating event – The obligating event is
the communication of the decision to employees, which gives rise to a constructive
obligation from that date, because it creates a valid expectation that the division
will be outsourced.
An outflow of resources embodying economic benefits or service potential in
settlement – Probable.
Conclusion
A provision is recognised at March 31, 2013 for the best estimate of the costs of
outsourcing the ward office (see paragraphs 22 and 83).
Legal Requirement to Fit Air Filters
IG11. Under new legislation, a local body is required to fit new air filters to its
public buildings by 30 June 2013. The entity has not fitted the air filters.
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Provisions, Contingent Liabilities and Contingent Assets
Analysis
(a) At the reporting date of March 31, 2013
Present obligation as a result of a past obligating event – There is no obligation
because there is no obligating event either for the costs of fitting air filters or for
fines under the legislation.
Conclusion
No provision is recognised for the cost of fitting the filters (see paragraphs 22
and 25–27).
Analysis
(b) At the reporting date of March 31, 2014
Present obligation as a result of a past obligating event – There is still no
obligation for the costs of fitting air filters because no obligating event has
occurred (the fitting of the filters). However, an obligation might arise to pay
fines or penalties under the legislation because the obligating event has occurred
(the non-compliance of the public buildings).
An outflow of resources embodying economic benefits or service potential in
settlement – Assessment of probability of incurring fines and penalties for non-
compliance depends on the details of the legislation and the stringency of the
enforcement regime.
Conclusion
No provision is recognised for the costs of fitting air filters. However, a provision
is recognised for the best estimate of any fines and penalties that are more
likely than not to be imposed (see paragraphs 22 and 25–27).
Staff Retraining as a Result of Changes in the Property Tax System
IG12.The local body introduces a number of changes to the property tax system.
As a result of these changes, the local body X (reporting entity) will need to
retrain a large proportion of its administrative and compliance staff in order to
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Compendium of ASLBs
ensure continued compliance with property tax regulations. At the reporting
date, no retraining of staff has taken place.
Analysis
Present obligation as a result of a past obligating event – There is no obligation
because no obligating event (retraining) has taken place.
Conclusion
No provision is recognised (see paragraphs 22 and 25–27).
An Onerous Contract
IG13. A hospital laundry operates from a building that the hospital (the reporting
entity) has leased under an operating lease. During March 2014, the laundry
relocates to a new building. The lease on the old building continues for the next
four years; it cannot be canceled. The hospital has no alternative use for the
building and the building cannot be re-let to another user.
Analysis
Present obligation as a result of a past obligating event – The obligating event is
the signing of the lease contract, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits or service potential in
settlement – When the lease becomes onerous, an outflow of resources
embodying economic benefits is probable. (Until the lease becomes onerous,
the hospital accounts for the lease under ASLB 13, ‘Leases’).
Conclusion
A provision is recognised for the best estimate of the unavoidable lease payments
(see paragraphs 13(b), 22 and 76).
A Single Guarantee
IG14.During F.Y. 2013-14, a local body gives a guarantee of certain borrowings
of a private sector operator providing public services for a fee, whose financial
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Provisions, Contingent Liabilities and Contingent Assets
condition at that time is sound. During F.Y. 2013-14, the financial condition of
the operator deteriorates and, at June 30, 2013, the operator files for protection
from its creditors.
Analysis
(a) At March 31, 2013
Present obligation as a result of a past obligating event – The obligating event is
the giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits or service potential in
settlement – No outflow of benefits is probable at March 31, 2013.
Conclusion
No provision is recognised (see paragraphs 22 and 31). The guarantee is
disclosed as a contingent liability unless the probability of any outflow is regarded
as remote (see paragraph 100).
Analysis
(b) At March 31, 2014
Present obligation as a result of a past obligating event – The obligating event is
the giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits or service potential in
settlement – At March 31, 2014, it is probable that an outflow of resources
embodying economic benefits or service potential will be required to settle the
obligation.
Conclusion
A provision is recognised (see paragraphs 22 and 31).
Note: This example deals with a single guarantee. If an entity has a portfolio of
similar guarantees, it will assess that portfolio as a whole in determining whether
an outflow of resources embodying economic benefit is probable (see paragraph
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Compendium of ASLBs
32). Where an entity gives guarantees in exchange for a fee, revenue is
recognised in accordance with ASLB 9, “Revenue from Exchange Transactions”.
A Court Case
IG15. In a school (the reporting entity) run by local body in January 2013, ten
students died, possibly as a result of food poisoning from food provided under
mid-day meal scheme. Legal proceedings are started seeking damages from
the entity, but it disputes liability. Up to the date of authorisation of the financial
statements for the year to March 31, 2013 for issue, the entity’s lawyers advise
that it is probable that the entity will not be found liable. However, when the
entity prepares the financial statements for the year to March 31, 2014, its
lawyers advise that, owing to developments in the case, it is probable that the
entity will be found liable.
Analysis
(a) At March 31, 2013
Present obligation as a result of a past obligating event – On the basis of the
evidence available when the financial statements were approved, there is no
obligation as a result of past events.
Conclusion
No provision is recognised by the school (see paragraphs 23 and 24). The
matter is disclosed as a contingent liability unless the probability of any outflow
is regarded as remote (paragraphs 100 and 109).
Analysis
(b) At March 31, 2014
Present obligation as a result of a past obligating event – On the basis of the
evidence available, there is a present obligation.
An outflow of resources embodying economic benefits or service potential in
settlement – Probable.
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Provisions, Contingent Liabilities and Contingent Assets
Conclusion
A provision is recognised for the best estimate of the amount to settle the
obligation (paragraphs 22–24 and 109).
Repairs and Maintenance
IG16. Some assets require in addition to routine maintenance, substantial
expenditure every few years for major refits or refurbishment and the replacement
of major components. ASLB 17, ‘Property, Plant, and Equipment’, gives guidance
on allocating expenditure on an asset to its component parts where these
components have different useful lives or provide benefits in a different pattern.
Refurbishment Costs—No Legislative Requirement
IG17. A furnace has a lining that needs to be replaced every five years for
technical reasons. At the reporting date, the lining has been in use for three
years.
Analysis
Present obligation as a result of a past obligating event – There is no present
obligation.
Conclusion
No provision is recognised (see paragraphs 22 and 25–27).
The cost of replacing the lining is not recognised because, at the reporting date,
no obligation to replace the lining exists independently of the entity’s future
actions–even the intention to incur the expenditure depends on the entity deciding
to continue operating the furnace or to replace the lining. Instead of a provision
being recognised, the depreciation of the lining takes account of its consumption,
that is, it is depreciated over five years. The re-lining costs then incurred are
capitalised, with the consumption of each new lining shown by depreciation over
the subsequent five years.
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Compendium of ASLBs
Refurbishment Costs—Legislative Requirement
IG18. Replacement of a major part of oil tanker is required by law to overhaul it
once every three years.
Analysis
Present obligation as a result of a past obligating event – There is no present
obligation.
Conclusion
No provision is recognised (see paragraphs 22 and 25–27).
The costs of overhauling oil tanker are not recognised as a provision for the
same reasons as the cost of replacing the lining is not recognised as a provision
in Example IG17. Even a legal requirement to overhaul does not make the costs
of overhaul a liability, because no obligation exists to overhaul the oil tanker
independently of the entity’s future actions – the entity could avoid the future
expenditure by its future actions, for example by selling the oil tanker.
Disclosures
An example of the disclosure required by paragraph 98 is given below.
IG 19. [Refer to Appendix 1]
Decommissioning Costs
IG20. In 2013, a local body - uses a waste disposal and recycling plant,
recognises a provision for decommissioning costs of Rs. 100 lakhs. The provision
is estimated using the assumption that decommissioning will take place in 20-30
years’ time. The following information is disclosed:
A provision of Rs. 100 lakhs has been recognised for decommissioning costs.
These costs are expected to be incurred between 2033 and 2043.
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Provisions, Contingent Liabilities and Contingent Assets
Disclosure Exemption
An example is given below of the disclosures required by paragraph 109 where
some of the information required is not given because it can be expected to
prejudice seriously the position of the entity.
IG21. A local body research agency is involved in a dispute with a company,
which is alleging that the research agency has infringed copyright in its use of
genetic material, and is seeking damages of Rs. 100 million. The research
agency recognises a provision for its best estimate of the obligation, but discloses
none of the information required by paragraphs 97 and 98 of the Standard. The
following information is disclosed:
Litigation is in process against the agency relating to a dispute with a company
that alleges that the agency has infringed patents, and is seeking damages of
Rs. 100 million. The information usually required by ASLB 19, ‘Provisions,
Contingent Liabilities and Contingent Assets’, is not disclosed, on the grounds
that it can be expected to prejudice seriously the outcome of the litigation. The
management is of the opinion that the claim can be successfully defended by
the agency.
Disclosure of contingent asset
An example is given below of the disclosure required by paragraph 105 which
requires an entity to disclose a brief description of the nature of the contingent
asset at the reporting date where an inflow of the economic benefits or service
potential is probable.
IG 22 A local body has filed a legal case on its supplier for liquidated damages
of Rs. 1 lakh . The supplier has disagreed with the claim and is unwilling to
make settlement outside court. The position was same at the reporting date i.e.
March 31, 2013. Subsequently, during the March 2014, the court ruled a judgment
in favour of the local body. However, the supplier has filed an appeal against
the court order. Management of the local body is of the opinion that again the
court order will be in its favour.
Analysis:
(a) At March 31, 2013
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Compendium of ASLBs
In this case an inflow of economic benefits is not probable.
Conclusion:
No disclosure of contingent asset is required.
Analysis:
(b) At March 31, 2014
In this case an inflow of economic benefits is probable.
Conclusion:
A disclosure of the best estimate of the amount of contingent asset is made.
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Provisions, Contingent Liabilities and Contingent Assets
Appendix 1
Note: This Appendix is not a part of the Accounting Standard for Local Bodies.
The purpose of this Appendix is only to bring out the major differences, if any,
between Accounting Standard for Local Bodies (ASLB) 19 and the corresponding
International Accounting Standard (IPSAS) 19, ‘Provisions, Contingent Liabilities
and Contingent Assets’
Comparison with IPSAS 19, ‘Provisions, Contingent
Liabilities and Contingent Assets’
● IPSAS 19 clearly mentions provisions, contingent liabilities and contingent
assets arising from insurance contracts within the scope of the relevant
international or national accounting standard dealing with insurance
contracts and those arising in relation to income taxes or income tax
equivalents are excluded from the scope of this standard. However, the
same has been deleted in ASLB 19.
● As per IPSAS 19, where the effect of the time value of money is material,
the amount of a provision shall be discounted at a pre-tax discount rate
and certain disclosures are required to be made in this regard. Whereas,
ASLB 19 does not require discounting of the provisions keeping in view
that the Local Bodies in India are at very initial stages of implementation
of accrual basis of accounting.
● IPSAS 19 does not apply to financial instruments (including guarantees)
that are within the scope of IPSAS 29, ‘Financial Instruments: Recognition
and measurements’ whereas ASLB 19 applies to financial instruments
(including guarantees) that are not carried at fair value but excludes that
are carried at fair value.
● Some examples in the Standard and in implementation guidance have
been deleted and some have been modified to better address the
circumstances of the local bodies. An example on disclosure of contingent
assets has also been included which is not there in the corresponding
IPSAS.
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Compendium of ASLBs
● Definitions of ‘Obligation’, ‘Present Obligation’ and ‘Possible Obligation’
have been included in ASLB 19.
● The IPSAS 19 excludes provisions, contingent liabilities and contingent
assets arising from social benefits provided by an entity for which it does
not receive consideration that is approximately equal to the value of
goods and services provided directly in return from the recipients of those
benefits from the scope of the Standard. Whereas in ASLB 19 the said
exclusion has been modified as provisions, contingent liabilities and
contingent assets arising from social benefits of an entity for which it
does not receive any consideration or receives a nominal consideration.
● ASLB 19 uses different terminology, in certain instances, from existing
IPSAS 19, for example, use of ‘Statement of Income and Expenditure’ in
ASLB 19. The equivalent term in IPSAS 29 is ‘Statement of Financial
Performance’.
● In order to simplify the guidance with respect to the ‘best estimate’, the
‘requirements of weighting all possible outcomes by their associated
probabilities in case of large populations of item’ and ‘considering all
possible outcomes along with most likely outcome in case of a single
obligation’, have been removed from the ASLB 19.
● In IPSAS 19, under transitional provisions entities are encouraged, but
not required, to (a.) adjust the opening balance of accumulated surpluses/
(deficits) for the earliest period presented, and (b.) to restate comparative
information. If comparative information is not restated, this fact should be
disclosed. The aforesaid transitional provisions have been deleted in
ASLB 19.
● Paragraphs relating to effective date have been removed as ASLB 19
would become mandatory for Local Bodies in a state from the date
specified by the State Government concerned.
● Consequential changes resulting from above departures have been made
in ASLB 19. However, paragraph numbers have been retained in order to
maintain consistency with IPSAS 19.
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Provisions, Contingent Liabilities and Contingent Assets
Appendix 2
Note: This Appendix is not a part of the Accounting Standard for Local Bodies.
The purpose of this Appendix is only to bring out the major differences, if any,
between Accounting Standard for Local Bodies (ASLB) 19 and the corresponding
existing AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’
Major differences between Existing AS 29 and ASLB 19, ‘Provisions,
Contingent Liabilities and Contingent Assets’
● The scope of ASLB 19 clarifies that it does not apply to provisions,
contingent liabilities and contingent assets arising from social benefits of
an entity. ASLB 19 also provides that if the entity elects to recognise
provisions for social benefits, certain disclosures are required to be made.
Existing AS 29 does not deal with the same.
● AS 29 excludes provisions, contingent liabilities and contingent assets
arising in insurance enterprises from contracts with policy-holders from
the scope of this standard. However, the said exclusion is not there in the
ASLB 19 as this is not relevant in context of local bodies.
● The existing AS 29 prohibits disclosure of a contingent asset in the financial
statements but the same is usually disclosed in the report of the approving
authority but whereas ASLB 19 requires disclosure of contingent assets
in the financial statements when an inflow of economic benefits is probable.
● Unlike the existing AS 29, ASLB 19 requires creation of provisions in
respect of constructive obligation also. Consequential changes resulted
from the same has also been made in the ASLB.
● ASLB 19 uses different terminology, in certain instances, from existing
AS 29. For example use of ‘Statement of Income and expenditure’ and
‘net deficit’ in ASLB 19. The equivalent term in existing AS 29 is ‘statement
of profit and loss’ and ‘loss’ respectively.
● ASLB 19 makes it clear that before a separate provision for an onerous
contract is established, an entity should recognise any impairment loss
that has occurred on assets dedicated to that contract in accordance with
ASLB 17, ‘Property, Plant and Equipment’. There is no such specific
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Compendium of ASLBs
provision in the existing AS 29. The ASLB 19 also provides additional
guidance on the subject.
● Examples and Implementation Guidance in the ASLB 19 are more
reflective of the circumstances of the Local Bodies.
266