Accounting Standard 29 (1)

8/20/2019 Accounting Standard 29 (1)

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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 indealing with contingent assets , e)cept*

(a" those resulting &rom &inancial instrumentsthat 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 &romcontracts with policholders+ and

(d" those covered b another Accounting Standard'


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-e&initions

♦ A provision is a liabilit which can be measured onlb using a substantial degree o& estimation'

♦ A liabilit is a present obligation o& the enterprise

arising &rom past events , the settlement o& which ise)pected to result in an out&low &rom the enterpriseo& resources emboding economic bene&its'

♦ An obligating event is an event that creates an

obligation that results in an enterprise having norealistic alternative to settling that obligation'

Cont.


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♦ A contingent liabilit is*

(a" a possible obligation that arises &rom past eventsand the e)istence o& which will be con&irmed onl b the

occurrence or nonoccurrence 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 emboding economic bene&its will be requiredto settle the obligation+ or

(ii" a reliable estimate o& the amount o& the

obligation cannot be made'

-e&initions


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♦ A contingent asset is a possible asset that arises &rom

past events the e)istence o& which will be con&irmedonl b the occurrence or non occurrence o& one ormore uncertain &uture events not wholl within thecontrol o& the enterprise'

♦ Present obligation an obligation is a presentobligation 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, itse)istence at the balance sheet date is considered not probable'

♦ A restructuring is a programme that is planned andcontrolled b management, and materiall changeseither*

(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 aresult o& a past event+

(b" it is probable that an out&low o& resources emboding economic bene&its will be required to settlethe obligation+ and

(c" a reliable estimate can be made o& theamount o& the obligation'

♦ & 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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easurement

♦ 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 tosettle an obligation should be re&lected in the amounto& a provision where there is su&&icient ob$ectiveevidence 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 ise)pected to be reimbursed b another part, the reimbursement shouldbe recognised when, and onl when, it is virtuall certain thatreimbursement will be received i& the enterprise settles the obligation'

♦ %he reimbursement should be treated as a separate asset ' %he amountrecognised &or the reimbursement should not e)ceed the amount o& the

provision'

♦ n the statement o& pro&it and loss, the e)pense relating to a provisionma be presented net o& the amount recognised &or a reimbursement'


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♦ Changes in Provisions

Provisions should be reviewed at each balance sheetdate and ad$usted to re&lect the current best estimate '

& it is no longer probable that an out&low o& resourcesemboding 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 &orwhich the provision was originall recognised'


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Application o& the 0ecognition and

easurement 0ules

♦ 6uture #perating Losses Provisions should not be recognised &or &uture operating losses'

♦ 0estructuring o obligation arises &or the sale o& an operation until the enterprise iscommitted 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 shoulddisclose*

(a" the carring 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 thee)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, anenterprise 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 theamount o& an asset that has been recognised &or that e)pectedreimbursement'


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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'

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

in&ormation required b in above disclosures can be e)pected

to pre$udice seriousl the position o& the enterprise in a disputewith other parties on the sub$ect matter o& the provision or

contingent liabilit' n 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 reasonwh, the in&ormation has not been disclosed'

- i i %


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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

liabilityDo 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 costsof 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

arch 2::; it is virtuall certain that a law requiring a cleanup o&

land alread contaminated will be enacted shortl a&ter the ear end'


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♦ 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 emboding 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' inet 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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♦ 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' ts polic o& ma/ing

re&unds is generall /nown'


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The obligating event is the sale of the pro!ct$ "hich givesrise to an obligation beca!se obligations also arise fromnormal 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 emboding economic bene&its insettlement

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

♦ Conclusion - ' provision is recogni(e for the best estimateof the costs of ref!ns


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♦ ,xample 5- .egal Re*!irement to /it mo)e /ilters

5nder new legislation, an enterprise is requiredto &it smo/e &ilters to its &actories b !: September 2::;' %heenterprise has not &itted the smo/e &ilters'

(a" At the balance sheet date o& !1 arch 2::;

(b" At the balance sheet date o& !1 arch 2::>


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There is still no obligation for the costs of fitting smo)e filters beca!seno obligating event has occ!rre the fitting of the filters% o"ever$ anobligation might arise to pa# fines or penalties !ner the legislation

beca!se the obligating event has occ!rre the non+compliant operation ofthe factor#%

♦ An out&low o& resources emboding 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 thestringenc# of the enforcement regime%

♦ Conclusion

o provision is recogni(e for the costs of fitting smo)e filters%

o"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 Changesin the Income Tax System

%he government introduces a number o& changes to theincome ta) sstem' As a result o& these changes, anenterprise in the &inancial services sector will need to

retrain a large proportion o& its administrative and saleswor/&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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♦ Present obligation as a result o& a past obligating event -

There is no obligation beca!se no obligating event

retraining has ta)en place%

♦ Conclusion - o 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


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


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

♦ Conclusion - o provision is recognise % The g!arantee is isclose as acontingent 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 obligatingevent is the giving of the g!arantee$ "hich gives rise to a legal obligation%

♦ An out&low o& resources emboding economic bene&its in settlement 't 31

arch 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- ' o!rt ase

A&ter a wedding in 2::=:;, ten people died, possibl as a result o& &ood poisoning &rom productssold b the enterprise' Legal proceedings are startedsee/ing damages &rom the enterprise but it disputesliabilit' 5p to the date o& approval o& the &inancial

statements &or the ear !1 arch 2::;, the enterprise@slawers advise that it is probable that the enterprise willnot be &ound liable' owever, when the enterprise

prepares the &inancial statements &or the ear !1 arch2::>, its lawers advise that, owing to developments in

the case, it is probable that the enterprise will be &oundliable'


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♦ (a) At 31 March 200

♦ Present obligation as a result o& a past obligating event - n 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 - o 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"


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


&robable%

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

amo!nt to settle the obligation


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♦ 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 9b♦ Present obligation as a result of a &ast obligating event - There is no present

obligation%♦ !onclusion - o provision is recogni(e

The cost of replacing the lining is not recogni(e beca!se$ at the balance sheet ate$ noobligation to replace the lining exists inepenentl# of the compan#s f!t!re actions +even the intention to inc!r the expenit!re epens on the compan# eciing tocontin!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 presentobligation%

♦ !onclusion - o provision is recogni(e The costs of overha!ling aircraft are notrecogni(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 oesnot ma)e the costs of overha!l a liabilit#$ beca!se no obligation exists to overha!l theaircraft inepenentl# of the enterprises f!t!re actions : the enterprise co!l avoi thef!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 areli/el to entail out&low o& economic resources in &uture

periods consequent to obligating events prior to the close o&the ear'

o otes to Accounts*

As required b AS 29, mandator in its application withe&&ect &rom 1st April, 2::=, recognised a liabilit

aggregating to 0s' ..' 6or e)pected warrant claimsthat are estimated to be incurred in &uture periods arisingout o& sales made upto the closure o& the ear' 5ntil last ear, the liabilit in respect o& warrant claims wasrecognised b charging onethird value o& sparesinventor'


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♦ 0amco Sstems 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

;' ncome %a) Liabilit


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Accounting Standard 29 (1)

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