1. Section 21 Provisions & Contingencies
Presented by Robert Kirk

2. Scope Note Worthy This section does not apply to provisions for;
Leases
Income Tax
Employee Benefit obligations
Value adjustments such as bad debts or NRV provisions
Note Worthy
No change to IFRS or Irish and UK GAAP

3. Definitions
Liability is an obligation to transfer economic benefits as a result of past transactions or events where the transfer is probable.
Provision is a liability of uncertain timing or amount
Contingent liability is:
A possible but uncertain obligation or
A present obligation that is not recognized because it is not
probable or the amount of the obligation cannot be estimated
reliably.

4. Initial Recognition only when
An entity has a present obligation (legal or constructive)
as a result of a past event at the reporting date
It is probable (more than likely,51%+) that a transfer of economic resources will be required to settle the obligation.
A reliable estimate can be made of the amount required to settle the obligation.

5. Obligation An Obligation can be either Legal or Constructive Legal:
Obligation arising from a contract or some other aspect of the
law.
If a law is most likely to be enacted and will act retrospectively,
then an obligation exists prior to enactment.

6. Obligation Constructive :
Where a 3rd party has a legitimate expectation (as a result of
past actions of the company or published policies by the entity)
that a transfer of economic resources to the 3rd party will take
place.
For an event to be obligating, it must show that it has no
realistic alternative to settling the obligation

7. Past Event
The event leading to the present obligation must be past and must have occurred before the Balance Sheet date.
No provision can be made for costs that may be incurred in the future but where no obligation yet exists.

8. Reliable Estimate
No provision should be made until it is possible to make a reliable estimate (rare that a reliable estimate cannot be made)
An entity shall measure a provision at the “Best estimate of the amount required to settle the obligation at the reporting date”
  Measurement of Provisions
Single Obligations – Take most likely outcome
Large population of potential obligations – Calculate the expected value by weighting all the expected outcomes with their associated probabilities

9. Measurement - Discounting Provisions
Where the effect of the time value of money is material, the provision should be discounted to its NPV (net present value).
In practice, discounting is only likely to be required where cash flows will occur in several years time (e.g. decommissioning provision).
Rate used should be the pre-tax rate that reflects the time value of money and risks attached to the liability

10. Example
Year end 31/12/xo
Legal Fine for 1,000,000 Euro expected to be paid on 31/12/x2, Discount rate of 10%
Required
Calculate Provision in the SOFP & Expense in the Income Statement for X0,X1,X2

11. Solution Provision in the SOFP at Year end
31/12/xo = 1,000,000 /(1.10)/(1.10)
= 826,446
31/12/x1 = 1,000,000/(1.10) = 909,090
31/12/x2 = 1,000,000/(1.0) =1,000,000
Expense in the Income Statement
31/12/x1 = ,090 – 826,446 = 82,644
31/12/x2 = 1,000, ,090 = 90,909

12. Contingencies – Liability
Contingent Liabilities should not be recognised.
They should be disclosed unless the possibility of a transfer of economic benefit is remote.
For each class of Contingent Liability, disclose:
The estimate of the financial effect
An indication of the uncertainties relating to the timing or the amount.
The possibility of any reimbursement

13. Contingent Asset
Do not recognize a Contingent Asset unless its “ future benefits
are virtually certain”
If future benefits “probable”, disclose details by note
For each class of Contingent Asset, disclose:
The estimate of the financial effect
An indication of the uncertainties relating to the timing or the amount
If benefits only “possible or even remote”, do not disclose in the Financial Statements.

14. Certain Provisions not allowed:
Provisions for future operating losses
(past event )
Self Insurance provisions
(no obligation)
Refurbishment provisions
  ( no obligation)   

15. Restructuring Provision
Definition of Restructuring:
A Restructuring is a program that is;
planned and controlled by management and has a material
effect on;
The scope of the business undertaken by the reporting entity in terms of the goods and services it provides, or
The manner in which a business undertaken by the reporting entity is conducted.   

16. Types of Restructuring
A restructuring could include;
Sale or termination of a line of business
The closure of business locations in a country or region or the relocation of business activities from one country to another.
Changes in Management structure.
Fundamental reorganisations that have a material effect on the nature and focus of the entity’s operations.

17. When to provide Can only provide when an entity has a constructive
obligation to carry out the restructuring.
This is reflected by:
A comprehensive plan has been drawn up, identifying locations, businesses, employees etc.
Those effected have a valid expectation that the restructuring will be carried out.
e.g. it has already commenced or has been announced to those effected by it.
NB: It cannot be confidential & only known by the Board

18. When to provide The Obligation must exist at year-end.
Board approval - A board decision is not sufficient in it’s own. It must be supported by the plan & the notification to those effected.
An announcement to sell an operation is not sufficient. An obligation only exists when there is a binding contract to sell.

19. When to provide
Timing
It is important that the Restructuring has commenced or will commence as soon as possible & will be completed in a reasonable time frame.
The longer the time-frame to complete may make it more likely that changes to the plan will occur and 3rd parties may not have a “valid expectation” that the “Restructuring” will take place.

20. Extent of Restructuring Provision
Provision must be confined to direct expenditure
necessarily entailed by the Restructuring.
Allowed 
It should include any impairments of non current assets.
Redundancy costs
Costs to terminate contracts.
Legal fees

21. Expenses not allowed in Restructuring
It cannot be associated with ongoing activities of the entity;
Retraining, marketing, relocation or modifications costs.
Future operating losses (unless from an onerous contract)
Expected gains on sale of assets arising in a restructuring can not be included in the “Restructuring provision”

22. Special Situations Onerous Contracts
A contract where the costs of fulfilling /completing
the contract now exceed the benefits to be received
(contract revenue)
A provision should be made for the minimum additional costs of an onerous contract. Additional Costs are the amount by which costs are expected to exceed the benefits
Example – Irrevocable leases on unoccupied
Buildings
- Operating Leases on obsolete Machines   

23. Decommissioning Costs (asset retirement obligations)
An entity may be required to clean up a location
where it has been working when production ceases.
An entity has an obligation to clean up the site if
It is required by law
Its actions have created a constructive obligation to do so. (Company may have promised to clean up the site or it has adapted environmentally friendly policies and has made the public aware of it.)
A provision is only required if the environmental damage has happened (past event)

24. Accounting for future Decommissioning Costs
Decommissioning costs should be recognized when the related PPE is recognized.
It is a long-term liability and should be discounted.
When it relates to PPE, it should be capitalized as part of the PPE & depreciated as part of that cost.
Where extra future costs arise as a result of operations, these costs should be expensed in the year they are incurred

25. Disclosure of Provisions
All material provisions should be disclosed.
Nature of Provision including an indication of the timing of payment and details of any significant uncertainties.
Movement on the provision during the year including amounts paid, revision to amounts, opening and closing values.
The fact that the amount has been discounted where this is the case

26. Disclosures The amount of any anticipated recovery, stating
whether or not an asset has been recognised in
respect of the anticipated claim.
Comparative information for prior periods is not required
Note: Prejudicial Disclosures
If the directors are of the opinion that the disclosure of the nature of the provision would be prejudicial to the Company’s interest, then only the very general nature of the provision need be disclosed.
However, the provision must still be recognised in the accounts

27. Use of Provisions Note:.
Note:
A provision can only be used for its original use and must be
written back if no longer required. It cannot be used for a
different purpose.