liabilities, provisions and contingencies presentation … · i. introduction 3 the objective of...
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LIABILITIES, PROVISIONS AND CONTINGENCIES
Presentation by:
Jeremiah OliechFriday , 5th May 2017
Uphold public interest
Presentation agenda
Liabilities, Provisions and Contingencies
•Definition of a provision
• Main categories of provisions
•Recognition - concept of present legal or
constructive (non-legal) and measurement of
provision
•Key disclosure requirements
•Discussion on practical implementation
challenges (environmental provisions, etc.)
I. Introduction
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The objective of this standard is to define
provisions, contingent liabilities and
contingent assets and identify the
circumstances in which provisions should be
recognised, how they should be measured,
and the disclosures that should be made
about them. Standard also deals with
disclosures on contingent liabilities and
assets.
Introduction
I. Introduction
4
This standard applies to an entity that prepares
and presents its financial statements except:
-Provisions arising from insurance contracts
-Those resulting from executory contracts, other
than where the contract is onerous(Construction
contracts)
Scope
Scope of IAS 37/IPSAS 19
5
♦Applies to all entities in accounting for provisions, contingent liabilities and contingent assets except those:
− Resulting from executory contracts, unless they are onerous; or
− Covered by another standard, e.g.:
• Insurance contracts (IFRS 4)
• Financial instruments (IAS 39)
• Employee benefits (IAS 19)
• Construction contracts (IAS 11)
• Income taxes (IAS 12)
• Leases (IAS 17)
• Business combinations (IFRS 3)
Scope
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Constructive obligation- an obligation that
derives from an entity’s action where
-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
liabilities
- As a result, the entity has created a valid
expectation on the part of those other parties
that it will discharge those responsibilities
Definitions
I.
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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.
Definitions
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Contingent liability-
-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.
-A present obligation that arises from past
events and its not recognised because
Definitions
9
Contingent liability-
-It is not probable that an outflow of resources
embodying economic benefits or service
potential will be required to settle the
obligation or
The amount of the obligation cannot be
measured with sufficient certainty.
Definitions
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Provision- a liability of uncertain timing or
amount.
Legal obligation- an obligation that derives
from a contract, legislation or other operation
of law
An obligating event- is an event that creates a
legal or constructive obligation that results to
an entity having no realistic alternative to
settling that obligation
Definitions
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Payables and accruals usually have certainty
with the amount and the timing while
provisions do not.
Scope
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Generally or provisions are contingent because
there is no certainty in timing or amount.
However as per the standard, contingent liability
is used for liabilities that are not recognised
because their existence will only be confirmed
by a future occurrence or non occurrence and
they do not meet the recognition criteria
Provisions
2. Recognition
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A provision shall be recognised when:
-An entity has a present obligation to(legal or
constructive) as a result of a past event.
-It is probable that an outflow of resources
embodying economic benefits or service
potential will be required to settle the obligation
and
-A reliable estimate can be made of the
amount of the obligationIf these conditions are not met a provision shall
not be recognised.
Recognition
3. Recognition
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Examples of present obligation
-Penalties-Costs for unlawful environmental damage
Under probability of outflow of resources, the probability that there will be outflow of resources should be greater than the probability that it will not.
The estimate used should be reliable
Recognition
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Contingent liability-An entity shall not recognise a contingent liability
A contingent liability is disclosed in the financialstatements, unless the possibility of an outflow isof resources is remote.
An entity will assess its contingent liabilities toassess whether the recognition criteria has beenmet. If met, it should recognise a provision.
Recognition
4. Recognition
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Contingent AssetAn entity shall not recognise a contingent asset
A contingent asset is disclosed, where an inflow ofeconomic benefits or service potential is probable.
An entity will assess its contingent assets toassess whether the recognition criteria has beenmet. If met, it should recognise in the FS
Recognition
Recognition criteria – Judgement
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Possible guidelines:
♦Virtually certain: ≥ 90%
♦Probable (more likely than not): > 50%*
♦Possible: ≤ 50%
♦Remote: ≤ 10%
* In the standard
Recognition criteria- Judgment
Measurement
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Best estimate
The amount recognised as a provision shall be
the best estimate of the expenditure required to
settle the present obligation at the reporting
date.
The risks and uncertainties that inevitably
surround many events and circumstances
should be taken into account in reaching the
best estimate of a provision.
Measurement
6. Measurement
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- Where the effect of the time value for money
is material, the amount of a provision shall be
the present value of the expenditure expected
to be required to settle the obligation.
Measurement
6. Measurement
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An event that creates a legal or constructive
obligation that results in an entity having no realistic
alternative to settling that obligation.
The event must cause an obligation now, not at a
later date.
Past event
6. Changes in provisions
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Provisions shall 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 will be
reversed.
Changes in provisions
7. Disclosures
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For each class of provision the entity shall
disclose:
-The carrying amount at the beginning and end
of the period
-Additional provisions in the period, including
increases to existing provisions
-Amounts used during the period i.e. incurred
or charged against the provision
-Unused amounts during the period
- Changes due to the effect in discount rate
where present value has been used
Disclosures
7. Disclosures
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For each class of provision the entity shall
disclose:
-A brief description of the nature of the
provision and the expected timing of the
outflows of economic benefit or service
potential
-An indication of uncertainties about the timing
and amount of those outflows
-The amount of any expected reimbursement,
including any asset recognised for the expected
reimbursement
Disclosures
7. Disclosures
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Contingent liability
Unless the possibility of any outflow in
settlement is remote, an entity shall disclose,
for each class of contingent liability at the
reporting date , a brief description of the nature
of the contingent liability, and where
practicable:
- An estimate of its financial effect
- An indication of uncertainties relating to
amount and timing of outflow
- The possibility of any reimbursement.
Disclosures
7. Disclosures
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Contingent Assets
Where an inflow of economic benefits or
service potential is probable, an entity shall
disclose a brief description of the nature of the
contingent assets at the reporting date and
where applicable, an estimate of their financial
effect.
Disclosures
Interactive Session