Académique Documents
Professionnel Documents
Culture Documents
Overview of session
1. Scope of application 2. Key concepts 3. Recognition 4. Measurement 5. Disclosures 6. Specific implications / Next steps 7. Questions
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PwC
Scope
Covers accounting for all provisions and contingencies, excluding:
Social benefits provided by an entity for which it does not receive consideration that is approximately equal to the value of goods or services provided Provisions resulting from financial instruments carried out at fair value Provisions arising in relation to income taxes Employee benefits (except those that arise as a result of a restructuring) Provisions covered by another IPSAS
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Legislation; or
Other operation of law
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PwC
Provisions
Provisions
Write-downs
Write-downs
To reduce the carrying value of assets E.g. write-down of inventories to net realisable value; write-down of property, plant and equipment to recoverable amount
Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an enterprise tests these assets for impairment.
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Provisions - Recognition
A provision should be recognised as a liability in the balance sheet and as an expense in the economic outturn account when:
An entity has a present obligation (legal or constructive) as a result of a past event; and
PwC
Provisions - Recognition
Start
no
Possible obligation?
no
yes
Probable Outflow?
yes no
Remote?
yes
Decision Tree
yes
Reliable estimate?
no no
yes
Provide Disclose contingent liability Do nothing
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Examples
Item 1. Warranties given where some claims are more likely than not 2. Board decision which has not been communicated to those affected 3. Future operating losses 4. Pollution that an entity is obliged to clean up 5. Staff retraining needed as a result of law changes 6. Court case where a loss seems more likely than not 7. Repairs and maintenance 8. Single guarantee for which there is no probable outflow of economic True/False
benefits
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Can only include direct expenses associated with restructuring programme; cannot relate to ongoing operation of business
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A provision should be made for the present obligation net of recoveries the unavoidable costs reflect the least net cost of exiting from the contract, which is the lower of:
The cost of fulfilling it; and
PwC
PwC
Measurement
Best estimate at balance sheet date of amount needed to settle obligation If range is predicted with all the same likelihood of occurrence, mid point must be selected Large population of items expected value measurement Anticipated cash flows must be discounted at risk free rate where changing value of money over time is material:
- Carrying value of liability increases by imputed interest in each period; recognised as interest expense in income statement
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25% x 100,000 x 5
5% x 100,000 x 25 Estimated warranty expense
125,000
125,000 250,000
The warranty provision will be reduced to the extent of costs already incurred in respect of warranty claims on vacuum cleaners sold during the year.
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PwC
of 1,200 in two years time are estimated. The appropriate discount rate is 4.5 %.
Balance sheet
Additional costs
Year 1
0.9569
1,148
49
Year 2
1.0000
1,200
1,200
52
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Other issues
Reimbursement:
To be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation The reimbursement should be treated as a separate asset In the economic outturn account, the expenses relating to a provision may be presented net of the amount recognised for the reimbursement
Use of provision:
A provision should be used only for expenditures for which the provision was originally recognised.
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Disclosures - Provisions
Key disclosures required: Accounting policies for each major type of provision (for example, warranties) Movements in provisions during the period Descriptions of contingent liabilities and contingent assets
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Disclosures - Guarantees
Guarantees for pre-financing received for procurement and for grants Performance guarantees:
Regular performance guarantees: disclose Specific guarantees related to performance guarantees: do not disclose but consider as they are automatically activated and are in essence a liability towards the contractor
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Yes
Yes
Yes
Minimum in the range of possible outcomes Maximum possible outcome disclosed On a case by case basis
Yes
Legal disputes
Yes
Yes
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