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

3

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

6

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.

7

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

8

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

10

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

11

Payables and accruals usually have certainty

with the amount and the timing while

provisions do not.

Scope

12

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

13

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

14

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

15

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

16

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

17

Possible guidelines:

♦Virtually certain: ≥ 90%

♦Probable (more likely than not): > 50%*

♦Possible: ≤ 50%

♦Remote: ≤ 10%

* In the standard

Recognition criteria- Judgment

Measurement

18

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

19

- 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

20

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

21

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

22

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

23

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

24

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

25

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