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Accounting Standard 29
Provisions,Contingent Liabilities
and Contingent Assets
(applicable to level 1 enterprises, however disclosure
requirement not applicable to level 2 ! enterprises"
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#b$ective

%he ob$ective o& this Statement is to ensure that


appropriate recognition criteria and measurement bases
are applied to provisions and contingent liabilities and
that su&&icient in&ormation is disclosed in the notes to the
&inancial statements to enable users to understand their
nature, timing and amount'

%he ob$ective o& this Statement is also to la( down


appropriate accounting &or contingent assets'
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Scope
%his Statement should be applied in accounting
&or provisions and contingent liabilities and in
dealing with contingent assets, e)cept*
(a" those resulting &rom &inancial instruments
that are carried at &air value+
(b" those resulting &rom e)ecutor( contracts,
e)cept where the contract is onerous +
(c" those arising in insurance enterprises &rom
contracts with polic(,holders+ and
(d" those covered b( another Accounting
Standard'
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-e&initions

A provision is a liabilit( which can be measured onl(


b( using a substantial degree o& estimation'

A liabilit( is a present obligation o& the enterprise


arising &rom past events, the settlement o& which is
e)pected to result in an out&low &rom the enterprise
o& resources embod(ing economic bene&its'

An obligating event is an event that creates an


obligation that results in an enterprise having no
realistic alternative to settling that obligation'
Cont.
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A contingent liabilit( is*


(a" a possible obligation that arises &rom past events
and the e)istence o& which will be con&irmed onl( b( the
occurrence or non,occurrence o& one or more uncertain
&uture events not wholl( within the control o& the
enterprise+ or
(b" a present obligation that arises &rom past events
but is not recognised because*
(i" it is not probable that an out&low o&
resources embod(ing economic bene&its will be required
to settle the obligation+ or
(ii" a reliable estimate o& the amount o& the
obligation cannot be made'
-e&initions
6

A contingent asset is a possible asset that arises &rom


past events the e)istence o& which will be con&irmed
onl( b( the occurrence or non occurrence o& one or
more uncertain &uture events not wholl( within the
control o& the enterprise'

Present obligation , an obligation is a present


obligation i&, based on the evidence available, its
e)istence at the balance sheet date is considered
probable, i'e', more li/el( than not'
-e&initions
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Possible obligation , an obligation is a possible


obligation i&, based on the evidence available, its
e)istence at the balance sheet date is considered not
probable'

A restructuring is a programme that is planned and


controlled b( management, and materiall( changes
either*
(a" the scope o& a business underta/en b( an
enterprise+ or
(b" the manner in which that business is conducted'
-e&initions
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0ecognition

Provisions
A provision should be recognised when*
(a" an enterprise has a present obligation as a
result o& a past event+
(b" it is probable that an out&low o& resources
embod(ing economic bene&its will be required to settle
the obligation+ and
(c" a reliable estimate can be made o& the
amount o& the obligation'

1& these conditions (cumulative conditions"are not met,


no provision should be recognised'
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Contingent Liabilities
An enterprise should not recognise a
contingent liabilit('

Contingent Assets
An enterprise should not recognise a
contingent asset'
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2easurement

3est 4stimate
%he amount recognised as a provision should be the best estimate o& the
e)penditure required to settle the present obligation at the balance sheet
date' %he amount o& a provision should not be discounted to its present
value'

0is/s and 5ncertainties


%he ris/s and uncertainties that inevitabl( surround man( events and
circumstances should be ta/en into account in reaching the best estimate
o& a provision'
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6uture 4vents
6uture events that ma( a&&ect the amount required to
settle an obligation should be re&lected in the amount
o& a provision where there is su&&icient ob$ective
evidence that the( will occur'

4)pected -isposal o& Assets


7ains &rom the e)pected disposal o& assets should not
be ta/en into account in measuring a provision'
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0eimbursements

8here some or all o& the e)penditure required to settle a provision is


e)pected to be reimbursed b( another part(, the reimbursement should
be recognised when, and onl( when, it is virtuall( certain that
reimbursement will be received i& the enterprise settles the obligation'

%he reimbursement should be treated as a separate asset' %he amount


recognised &or the reimbursement should not e)ceed the amount o& the
provision'

1n the statement o& pro&it and loss, the e)pense relating to a provision
ma( be presented net o& the amount recognised &or a reimbursement'
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Changes in Provisions
Provisions should be reviewed at each balance sheet
date and ad$usted to re&lect the current best estimate'

1& it is no longer probable that an out&low o& resources
embod(ing economic bene&its will be required to settle
the obligation, the provision should be reversed'

5se o& Provisions


A provision should be used onl( &or e)penditures &or
which the provision was originall( recognised'
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Application o& the 0ecognition and
2easurement 0ules

6uture #perating Losses


Provisions should not be recognised &or &uture operating losses'

0estructuring
9o obligation arises &or the sale o& an operation until the enterprise is
committed to the sale, i'e', there is a binding sale agreement'
A restructuring provision should include onl( the direct e)penditures
arising &rom the restructuring which are those that are both*
(a" necessaril( entailed b( the restructuring+ and
(b" not associated with the ongoing activities o& the enterprise'
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-isclosure

6or each class o& provision, an enterprise should


disclose*
(a" the carr(ing amount at the beginning and end o&
the period+
(b" additional provisions made in the period,
including increases to e)isting provisions+
(c" amounts used (i'e' incurred and charged against
the provision" during the period+ and
(d" unused amounts reversed during the period'
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An enterprise should disclose the &ollowing &or each class o&


provision*
(a" a brie& description o& the nature o& the obligation and the
e)pected timing o& an( resulting out&lows o& economic bene&its+
(b" an indication o& the uncertainties about those out&lows'
8here necessar( to provide adequate in&ormation, an
enterprise should disclose the ma$or assumptions made
concerning &uture events, as addressed in &uture events+ and
(c" the amount o& an( e)pected reimbursement, stating the
amount o& an( asset that has been recognised &or that e)pected
reimbursement'
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5nless the possibilit( o& an( out&low in settlement is


remote, and enterprise should disclose &or each class o&
contingent liabilit( at the balance sheet date a brie&
description o& the nature o& the contingent liabilit( and,
where practicable*
(a" an estimate o& its &inancial e&&ect, measured
under measurement+
(b" an indication o& the uncertainties relating to
an( out&low+ and
(c" the possibilit( o& an( reimbursement'
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8here an( o& the in&ormation required is not disclosed


because it is not practicable to do so, that &act should be stated'

1n e)tremel( rare cases, disclosure o& some or all o& the


in&ormation required b( in above disclosures can be e)pected
to pre$udice seriousl( the position o& the enterprise in a dispute
with other parties on the sub$ect matter o& the provision or
contingent liabilit(' 1n such cases, an enterprise need not
disclose the in&ormation, but should disclose the general
nature o& the dispute, together with the &act that, and reason
wh(, the in&ormation has not been disclosed'
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-ecision %ree
Start
Present obligation as
a result of an
obligating event?
Probable outflow?
Reliable Estimate?
Provide
Possible obligation?
Remote?
Disclose contingent
liability
Do nothing
Yes
Yes
Yes
No
No
No
No
No
Yes
Yes
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4)amples

4)ample 1* warranties

A manu&acturer gives warranties at the time o& sale
to purchasers o& its product' 5nder the terms o& the
contract &or sale the manu&acturer underta/es to
ma/e good, b( repair or replacement, manu&acturing
de&ects that become apparent within three (ears &rom
the date o& sale' #n past e)perience, it is probable
(i'e' more li/el( than not" that there will be some
claims under the warranties'
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Recognition for example 1

Present obligation as a result o& a past obligating event -


The obligating event is the sale of the pro!ct "ith a
"arrant#$ "hich gives rise to an obligation%

An outflow of resources embodying economic benefits


in settlement
&robable for the "arranties as a "hole

Conclusion
' provision is recogni(e for the best estimate of the costs
of ma)ing goo !ner the "arrant# pro!cts sol before
the balance sheet ate
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4)ample 2* !ontaminated "and - "egislation #irtually


!ertain to be Enacted
An enterprise in the oil industr( causes contamination but does not
clean up because there is no legislation requiring cleaning up, and
the enterprise has been contaminating land &or several (ears' At !1
2arch 2::; it is virtuall( certain that a law requiring a clean,up o&
land alread( contaminated will be enacted shortl( a&ter the (ear end'
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Recognition for example 2

Present obligation as a result o& a past obligating event ,


The obligating event is the contamination of the lan
beca!se of the virt!al certaint# of legislation re*!iring
cleaning !p%

An out&low o& resources embod(ing economic bene&its in


settlement
&robable%

Conclusion
' provision is recogni(e for the best estimate of the costs
of the clean+!p
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4)ample !* $ffshore $ilfield


An enterprise operates an o&&shore oil&ield where its licensing
agreement requires it to remove the oil rig at the end o&
production and restore the seabed' 9inet( per cent o& the
eventual costs relate to the removal o& the oil rig and
restoration o& damage caused b( building it, and ten per cent
arise through the e)traction o& oil' At the balance sheet date,
the rig has been constructed but no oil has been e)tracted'
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Recognition for example 3

Present obligation as a result o& a past obligating event <


The constr!ction of the oil rig creates an obligation !ner the terms of the
licence to remove the rig an restore the seabe an is th!s an obligating
event% 't the balance sheet ate$ ho"ever$ there is no obligation to rectif#
the amage that "ill be ca!se b# extraction of the oil%

An out&low o& resources embod(ing economic bene&its in settlement


&robable%

Conclusion <
' provision is recogni(e for the best estimate of ninet# per cent of the
event!al costs that relate to the removal of the oil rig an restoration of
amage ca!se b# b!iling it %These costs are incl!e as part of the cost
of the oil rig%
The ten per cent of costs that arise thro!gh the extraction of oil are
recogni(e as a liabilit# "hen the oil is extracte%
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4)ample =% Refunds Policy


A retail store has a polic( o& re&unding purchases b(
dissatis&ied customers, even though it is under no
legal obligation to do so' 1ts polic( o& ma/ing
re&unds is generall( /nown'
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Recognition for example 4

Present obligation as a result o& a past obligating event


The obligating event is the sale of the pro!ct$ "hich gives
rise to an obligation beca!se obligations also arise from
normal b!siness practice$ c!stom an a esire to maintain
goo b!siness relations or act in an e*!itable manner%

An out&low o& resources embod(ing economic bene&its in


settlement
&robable$ a proportion of goos are ret!rne for ref!n

Conclusion - ' provision is recogni(e for the best estimate


of the costs of ref!ns
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,xample 5- .egal Re*!irement to /it 0mo)e /ilters


5nder new legislation, an enterprise is required
to &it smo/e &ilters to its &actories b( !: September 2::;' %he
enterprise has not &itted the smo/e &ilters'
(a" At the balance sheet date o& !1 2arch 2::;
(b" At the balance sheet date o& !1 2arch 2::>
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Recognition for example 5

Present obligation as a result o& a past obligating event



There is still no obligation for the costs of fitting smo)e filters beca!se
no obligating event has occ!rre 1the fitting of the filters2% 3o"ever$ an
obligation might arise to pa# fines or penalties !ner the legislation
beca!se the obligating event has occ!rre 1the non+compliant operation of
the factor#2%

An out&low o& resources embod(ing economic bene&its in settlement


'ssessment of probabilit# of inc!rring fines an penalties b# non+
compliant operation epens on the etails of the legislation an the
stringenc# of the enforcement regime%

Conclusion
4o provision is recogni(e for the costs of fitting smo)e filters%
3o"ever$ a provision is recogni(e for the best estimate of an# fines an
penalties that are more li)el# than not to be impose
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4)ample >* Staff Retraining as a Result of Changes


in the Income Tax System
%he government introduces a number o& changes to the
income ta) s(stem' As a result o& these changes, an
enterprise in the &inancial services sector will need to
retrain a large proportion o& its administrative and sales
wor/&orce in order to ensure continued compliance with
&inancial services regulation' At the balance sheet date,
no retraining o& sta&& has ta/en place'
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Recognition for example 6

Present obligation as a result o& a past obligating event -


There is no obligation beca!se no obligating event
1retraining2 has ta)en place%

Conclusion - 4o provision is recogni(e


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4)ample ?*A Single 7uarantee


-uring 2::=,:;, 4nterprise A gives a
guarantee o& certain borrowings o& 4nterprise 3,
whose &inancial condition at that time is sound'
-uring 2::;, :>, the &inancial condition o&
4nterprise 3 deteriorates and at !: September 2::;
4nterprise 3 goes into liquidation'
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Recognition for example no 7

(a) At 31 March 200

Present obligation as a result o& a past obligating event


The obligating event is the giving of the g!arantee$ "hich gives rise to an
obligation%

An out&low o& resources embod(ing economic bene&its in settlement


4o o!tflo" of benefits is probable at 31 5arch 2005%

Conclusion - 4o provision is recognise % The g!arantee is isclose as a


contingent liabilit# !nless the probabilit# of an# o!tflo" is regare as remote

(!) At 31 March 200"

Present obligation as a result o& a past obligating event + The obligating


event is the giving of the g!arantee$ "hich gives rise to a legal obligation%

An out&low o& resources embod(ing economic bene&its in settlement 't 31


5arch 2006$ it is probable that an o!tflo" of reso!rces embo#ing economic
benefits "ill be re*!ire to settle the obligation%

Conclusion - ' provision is recognise for the best estimate of the obligation
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,xample 8- ' 6o!rt 6ase


A&ter a wedding in 2::=,:;, ten people died,
possibl( as a result o& &ood poisoning &rom products
sold b( the enterprise' Legal proceedings are started
see/ing damages &rom the enterprise but it disputes
liabilit(' 5p to the date o& approval o& the &inancial
statements &or the (ear !1 2arch 2::;, the enterprise@s
law(ers advise that it is probable that the enterprise will
not be &ound liable' Aowever, when the enterprise
prepares the &inancial statements &or the (ear !1 2arch
2::>, its law(ers advise that, owing to developments in
the case, it is probable that the enterprise will be &ound
liable'
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Recognition for example 8

(a) At 31 March 200

Present obligation as a result o& a past obligating event - 7n the basis


of the evience available "hen the financial statements "ere
approve$ there is no present obligation as a res!lt of past events%

Conclusion -4o provision is recogni(e% The matter is isclose as a


contingent liabilit# !nless the probabilit# of an# o!tflo" is regare as
remote

(!) At 31 March 200"

Present obligation as a result o& a past obligating event

7n the basis of the evience available$ there is a present obligation%

An out&low o& resources embod(ing economic bene&its in settlement


&robable%

Conclusion - ' provision is recogni(e for the best estimate of the


amo!nt to settle the obligation
36

4)ample 9a*
A &urnace has a lining that needs to be
replaced ever( &ive (ears &or technical reasons' At the
balance sheet date, the lining has been in use &or
three (ears'

4)ample 9b*
An airline is required b( law to overhaul
its aircra&t once ever( three (ears'
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Recognition for example 9a 8 9b

Present obligation as a result of a &ast obligating event - There is no present


obligation%

!onclusion - 4o provision is recogni(e


The cost of replacing the lining is not recogni(e beca!se$ at the balance sheet ate$ no
obligation to replace the lining exists inepenentl# of the compan#9s f!t!re actions +
even the intention to inc!r the expenit!re epens on the compan# eciing to
contin!e operating the f!rnace or to replace the lining%

4)ample 93* 0e&urbishment Costs <

"egislative Re'uirement 'n airline is re*!ire b# la" to overha!l its aircraft once
ever# three #ears%

Present obligation as a result of a &ast obligating event - There is no present


obligation%

!onclusion - 4o provision is recogni(e The costs of overha!ling aircraft are not


recogni(e as a provision for the same reasons as the cost of replacing the lining is not
recogni(e as a provision in example 9'% ,ven a legal re*!irement to overha!l oes
not ma)e the costs of overha!l a liabilit#$ beca!se no obligation exists to overha!l the
aircraft inepenentl# of the enterprise9s f!t!re actions : the enterprise co!l avoi the
f!t!re expenit!re b# its f!t!re actions$ for example b# selling the aircraft%
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4)amples &or -isclosure

3a$a$ 4lectricals Ltd'


o
Accounting Policies *

Provisions
Provisions are recognised &or current obligations which are
li/el( to entail out&low o& economic resources in &uture
periods consequent to obligating events prior to the close o&
the (ear'
o
9otes to Accounts*
As required b( AS 29, mandator( in its application with
e&&ect &rom 1
st
April, 2::=, recognised a liabilit(
aggregating to 0s' ..' 6or e)pected warrant( claims
that are estimated to be incurred in &uture periods arising
out o& sales made upto the closure o& the (ear' 5ntil last
(ear, the liabilit( in respect o& warrant( claims was
recognised b( charging one,third value o& spares
inventor('
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0amco S(stems Ltd'


o
Accounting Policies *

Contingent Liabilities not provided &or*,


1' 4stimated amount o& contracts remaining to be
e)ecuted on Capital accounts
2' 3an/ 7uarantees
!' Letter o& Credit
=' #ctroi Liabilit(
;' 1ncome %a) Liabilit(
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Than) ;o!