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Exposure draft of the Accounting Standard for Local Bodies (ASLB) 19, Provisions, Contingent Liabilities and Contingent Assets (Last date Nov 5, 2014)
September, 17th 2014
                   Exposure Draft


Accounting Standard for Local Bodies (ASLB) 19


 PROVISIONS, CONTINGENT LIABILITIES AND
          CONTINGENT ASSETS

       (Based on corresponding IPSAS 19)




  (Last date of comments: November 5, 2014)




                      Issued by
 The Committee on Accounting Standards for Local Bodies
      The Institute of Chartered Accountants of India
                         New Delhi
                           1
                   EXPOSURE DRAFT ASLB 19--PROVISIONS, CONTINGENT
                         LIABILITIES AND CONTINGENT ASSETS
                                                                CONTENTS
                                                                                                                        Paragraph

Objective
Scope..............................................................................................................        1­17
      Social Obligations ................................................................................ ....             7­11
          Other Exclusions from the Scope of the Standard ............................ ....                               12­17
Definitions .................................................................................................... ....     18­21
          Provisions and other Liabilities .............................................................                     19
          Relationship between Provisions and
                 Contingent Liabilities ................................................................                 20­21
Recognition ................................................................................................. ...        22­43
          Provisions ...........................................................................................         22­34
                    Present Obligation ................................................................ ...              23­24
                    Past Event ............................................................................. ...         25­30
                    Probable Outflow of Resources Embodying
                    Economic Benefits or Service Potential.................................. ....                        31­32
                    Reliable Estimate of the Obligation........................................ ....                     33­34
          Contingent Liabilities ....................................................................... ....            35­38
          Contingent Assets ............................................................................. ....           39­43
Measurement ............................................................................................... .....        44­62
          Best Estimate ........................................................................................         44­49
          Risk and Uncertainties ...................................................................... ....             50­52
          Present Value .................................................................................... ....        53­57
          Future Events .................................................................................... ....        58­60
          Expected Disposals of Assets ........................................................... ....                  61­62
Reimbursements .............................................................................................             63­68
Changes in Provisions ....................................................................................               69­70


                                                                     2
Use of Provisions.......................................................................................... ...         71­72
Application of the Recognition and Measurement Rules.............................. ...                                  73­96
          Future Operating Net Deficits .......................................................... ...                  73­75
          Onerous Contracts ............................................................................ ...            76­80
          Restructuring .................................................................................... ...        81­96
                    Sale or Transfer of Operations ............................................. ...                    90­92
                    Restructuring Provisions ...................................................... ...                 93­96
Disclosure .................................................................................................... ...    97­109
Transitional Provisions ..................................................................................                110


Appendix A--Tables:                   Provisions,         Contingent          Liabilities,       Contingent           Assets    and
Reimbursements
Appendix B--Decision Tree
Appendix C--Implementation Guidance
Appendix 1--Comparison with IPSAS 19
Appendix 2--Comparison with Existing AS 29




                                                                   3
                                             INVITATION TO COMMENT

The Committee on Accounting Standards for Local Bodies of the Institute of Chartered
Accountants of India invites comments on any aspect of this Exposure Draft of Accounting
Standard for Local Bodies (ASLB) 19, `Provisions, Contingent Liabilities and Contingent
Assets'. Comments are most helpful if they indicate the specific paragraph or group of
paragraphs to which they relate, contain a clear rationale and, where applicable, provide a
suggestion for alternative wording.
Comments should be submitted in writing to the Secretary, Committee on Accounting
Standards for Local Bodies, The Institute of Chartered Accountants of India, ICAI Bhawan,
Post Box No. 7100, Indraprastha Marg, New Delhi ­ 110 002, so as to be received not later
than November 5, 2014.Comments can also be sent by e-mail at caslb@icai.in .
       ----------------------------------------------------------------------------------------------------------


                                                 Exposure Draft

                ACCOUNTING STANDARD FOR LOCAL BODIES (ASLB) 19
           PR O VIS IO N S , C O NT ING E N T LIA B IL ITIE S AND C O N TIN G E NT A SS E TS


(This Accounting Standard includes paragraphs set in bold italic type and plain type, which
have equal authority. Paragraphs in bold italic type indicate the main principles. This
Accounting Standard should be read in the context of its objectives and the Preface to the
Accounting Standards for Local Bodies1).

The Accounting Standard for Local Bodies (ASLB) , `Provisions, Contingent Liabilities and
Contingent Assets' issued by the Council of the Institute of Chartered Accountants of India,
will be recommendatory in nature in the initial years for use by the local bodies. This
Standard will be mandatory for Local Bodies in a State from the date specified in this
regard by the State Government concerned2.




Objective
The objective of this Standard is to define provisions, contingent liabilities and
contingent assets, identify the circumstances in which provisions should be
recognised, how they should be measured and the disclosures that should be made
about them. The Standard also requires that certain information be disclosed about
contingent liabilities and contingent assets in the notes to the financial statements to
enable users to understand their nature, timing and amount.



1
  Attention is specifically drawn to paragraph 4.2 of the `Preface to the Accounting Standards for Local Bodies',
according to which Accounting Standards are intended to apply only to items which are material.
2
  Reference may be made to the paragraph 7.1 of the `Preface to the Accounting Standards for Local Bodies' providing
the discussion on the compliance with the Accounting Standards for Local Bodies.
                                                           4
Scope

1. An entity which prepares and presents financial statements under the accrual
   basis of accounting should apply this Standard in accounting for provisions,
   contingent liabilities and contingent assets, except:
        a. Those provisions and contingent liabilities arising from social obligations
           of an entity for which it does not receive any consideration or receives a
           nominal consideration;
        b. [Refer to appendix-1]
        c. Those resulting from executory contracts, other than where the contract                                       is
           onerous subject to other provisions of this paragraph;
        d. [Refer to Appendix 1]
        e. Those        covered       by     another       Accounting Standard for Local Bodies
        f. [Refer to Appendix 1]
        g. Those arising from employee benefits except employee termination
           benefits that arise as a result of a restructuring as dealt with in this
           Standard;
        h. Those resulting from financial instruments3 that are carried at fair value.

2. This Standard applies to all entities           that are described as the Local
   Bodies in the Preface to Accounting Standards for Local Bodies 4.

3. [Refer to Appendix 1]

4. This Standard applies to financial instruments (including guarantees) that are not
   carried at fair value.

5. [Deleted]

6. This Standard applies to provisions for restructuring (including discontinuing
   operations). Where a restructuring meets the definition of a discontinuing operation,
   Guidance for additional disclosures may be drawn from AS 24 `Discontinuing
   Operations' till the time ASLB on the subject is issued.
Social Obligations

7. For the purposes of this Standard "social obligations" refer to goods, services and other
   benefits provided in the pursuit of the social policy objectives of a local body. These
   obligations may include:
3
 A financial Instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or
equity shares of another entity.
4
    Refer paragraph 1.3 of the `Preface to the Accounting Standards for Local Bodies'


                                                             5
   (a)   The delivery of health, education, housing, transport and other social services
         etc. in pursuit of social policy objective. In many cases, beneficiaries of these
         services are not required to pay anything or required to pay a nominal amount for
         these services; and

   (b)   Local bodies may make payments of benefits to families, the aged, the
         disabled, the unemployed, veterans and others. In other words, local bodies
         may provide financial assistance to individuals and groups in the community to
         access services to meet their particular needs, or to supplement their income.

8. In many cases, social obligations arise as a consequence of a commitment by the
   Government or Local Body to undertake particular activities on an on- going basis
   over the long term in order to provide particular goods and services to the
   community. The need for, and nature and supply of, goods and services to meet social
   policy will often depend on a range of demographic and social conditions and are
   difficult to predict. These obligations generally fall within the "social protection,"
   "education" and "health" and may often require an actuarial assessment to determine
   the amount of any liability arising in respect of them. For example, if a local body is
   providing free health care upto age of 5 years or subsidized health care to senior
   citizens over the age of 70, the differential between the cost of providing the service
   and the amount recovered against it will be outside the purview of this standard.

9. The exclusion of these provisions and contingent liabilities from the scope of this
   Standard reflects that both (a ) the determination of what constitutes the obligating
   event, and (b) the measurement of the liability in case of social obligations require
   further consideration and , accordingly, will be dealt through a separate Standard. For
   example, there are differing views about whether the obligating event occurs when
   the individual meets the eligibility criteria for the benefit or at some earlier stage. To
   continue the example in para 8, where the benefit of free health care upto the age of 5
   is announced, the determination of what constitutes an obligating event is difficult. Is it
   the birth of the child? Or registration for the benefit? Or registration of birth? Whether
   the question of the survival of the children upto the age of 5 is also to be considered?

10. Provisions and contingent liabilities arising from social obligations are excluded from the
    scope of this Standard. However, when an entity elects to recognize a provision for
    such obligations, the entity discloses the basis on which the provisions have been
    recognised and the measurement basis adopted. The entity also makes other disclosures
    required by this Standard in respect of those provisions. ASLB 1,
    `Presentation of Financial Statements', provides guidance on dealing with matters not
    specifically dealt with by another ASLB. ASLB 1 also includes requirements
    relating to the selection and disclosure of accounting policies.

11. In some cases, social obligations may give rise to a liability for which there is:
   (a)   Little or no uncertainty as to amount; and
   (b)   The timing of the obligation is not uncertain.
Accordingly, these are not likely to meet the definition of a provision in this Standard.
Where such liabilities for social obligations exist, they are recognised where they
satisfy the criteria for recognition as liabilities (refer also to paragraph 19). An example
                                             6
would be a period-end accrual for an amount owing to the existing beneficiaries in
respect of aged or disability pensions that have been approved for payment
consistent with the provisions of a contract or legislation.

Other Exclusions from the Scope of the Standard

12. This Standard does not apply to executory contracts unless they are onerous.
    Contracts  giving rise to social obligations are excluded from the scope of this
    Standard.

13. Where another Accounting Standard for Local Bodies deals with a specific type of
    provision, contingent liability or contingent asset, an entity applies that Standard
    instead of this Standard. For example, certain types of provisions are also addressed
    in the Standards on:
      (a)    Construction            contracts       (see         ASLB 11,   `Construction Contracts');and

      (b)    Leases (see ASLB 13, ` Leases'). However, as ASLB 13 contains no specific
             requirements to deal with operating leases that have become onerous, this
             Standard applies to such cases5.

14. T h is s t a n d a rd d o e s n o t apply to provisions arising from employee benefits
   (guidance on accounting for employee benefits is found in ASLB 25, `Employee
   Benefits'6).

15. Some amounts treated as provisions may relate to the recognition of revenue,
    for example where an entity gives guarantees in exchange for a fee. This Standard
    does not address the recognition of revenue. ASLB 9, `Revenue from Exchange
    Transactions', identifies the circumstances in which revenue from exchange
    transactions is recognised and provides practical guidance on the application of
    the recognition criteria. This Standard does not change the requirements of ASLB 9.

16. This Standard defines provisions as liabilities of uncertain timing and amount which
    can be m easured only by using a substantial degree of estim ation. The term `provision'
    is also used in the context of item s such as depreciation, im pairm ent of assets and
    doubtful debts: these are adjustm ents to the carrying am ounts of assets and are not
    addressed in this Standard.

17. Other Accounting Standards for Local Bodies specify whether expenditures are
    treated as assets or as expenses. These issues are not addressed in this
    Standard. Accordingly, this Standard neither prohibits nor requires capitalization of the
    costs recognised when a provision is made.




5
    This ASLB 13, `Leases' is under formulation.
6
    This ASLB 25, `Employee Benefits' is under formulation.
                                                              7
Definitions

18. The following terms are used in this Standard with the meanings specified:

   A constructive obligation is an obligation that derives from an entity's actions
   where:

   (a)   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 responsibilities; and

   (b)   As a result, the entity has created a valid expectation on the part          of
         those other parties that it will discharge those responsibilities.
   A 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.
   A contingent liability is:
   (a)   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; or
   (b)   A present obligation that arises from past events but is not recognised
         because:
         (i) It is not probable that an outflow of resources embodying economic
              benefits or service potential will be required to settle the obligation; or
         (ii) The amount of the obligation cannot be measured with sufficient
              reliability.
   Executory contracts are contracts under which neither party has performed
   any of its obligations or both parties have partially performed their
   obligations to an equal extent.

   A legal obligation is an obligation that derives from:

   (a)   A contract (through its explicit or implicit terms);

   (b)   Legislation; or

   (c)   Other operation of law.
   Liabilities are present obligations of the entity arising from past events, the
   settlement of which is expected to result in an outflow from the entity of
   resources embodying economic benefits or service potential.

   An obligating event is an event that creates a legal or constructive
   obligation that results in an entity having no realistic alternative to settling
   that obligation.


                                             8
   An onerous contract is a contract for the exchange of assets or services in
   which the unavoidable costs of meeting the obligations under the contract
   exceed the economic benefits or service potential expected to be received under
   it.

   Present o b lig atio n - an o b lig atio n is a p resent o b lig atio n if, b ased o n the
   evid ence ava ilab le, its existence at th e b alance sheet d ate is co nsid ered
   p ro b ab le, i.e., m o re likely than no t.

   Po ssib le o b lig atio n - an o b lig atio n is a p o ssib le o b lig atio n if, b ased o n th e
   e v id e n c e a v a ila b le , its e x is te n c e a t th e b a la n c e s h e e t d a te is
   co nsid ered no t p ro b ab le.

   A provision is a liability of uncertain timing or amount.
   A restructuring is a programme that is                    planned      and     controlled     by
   management, and materially changes either:
   (a)   The scope of an entity's activities; or
   (b)   The manner in which those activities are carried out.


   Provisions and Other Liabilities

19. Provisions can be distinguished from other liabilities such as payables and accruals
    because there is uncertainty about the timing or amount of the future expenditure
    required in settlement. By contrast:

   (a)   Payables are liabilities to pay for goods or services that have been received or
         supplied, and have been invoiced or formally agreed with the supplier (and
         include payments in respect of social obligations where formal agreements for
         specified amounts exist); and

   (b)   Accruals are liabilities to pay for goods or services that have been received or
         supplied, but have not been paid, invoiced, or formally agreed with the supplier,
         including amounts due to employees (for example, amounts relating to accrued
         leave encashment). Although it is sometimes necessary to estimate the amount
         or timing of accruals, the uncertainty is generally much less than for provisions.

   Accruals are often reported as part of accounts payable, whereas provisions
   are reported separately.

Relationship between Provisions and Contingent Liabilities

20. In a general sense, all provisions are contingent because they are uncertain in timing
    or amount. However, within this Standard, the term contingent is used for liabilities
    and assets that are not recognised because their 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. In addition, the term contingent liability is used
    for liabilities that do not meet the recognition criteria.

                                                 9
21. This Standard distinguishes between:
   (a)   Provisions--which are recognised as liabilities (assuming that a reliable
         estimate can be made) because they are present obligations and it is probable
         that an outflow of resources embodying economic benefits or service potential
         will be required to settle the obligations; and

   (b)   Contingent liabilities--which are not recognised as liabilities because they
         are either:
         (i) Possible obligations, as it has yet to be confirmed whether the entity has
              a present obligation that could lead to an outflow of resources
              embodying economic benefits or service potential; or
         (ii) Present obligations that do not meet the recognition criteria in this Standard
              (because either it is not probable that an outflow              of   resources
              embodying economic benefits or service potential will be required to settle
              the obligation, or a sufficiently reliable estimate of the amount of the
              obligation cannot be made).

Recognition
Provisions
22. A provision should be recognised when:
   (a)   An entity has a present obligation (legal or constructive) as a result of a
         past event;

   (b)   It is probable that an outflow of resources embodying economic benefits or
         service potential will be required to settle the obligation; and

   (c)   A reliable estimate can be made of the amount of the obligation.

   If these conditions are not met, no provision should be recognised.

Present Obligation

23. In some cases, it is not clear whether there is a present obligation. In these
    cases, a past event is deemed to give rise to a present obligation if, taking
    account of all available evidence, it is more likely than not that a present
    obligation exists at the reporting date.

24. In most cases, it will be clear whether a past event has given rise to a present
    obligation. In other cases, for example in a lawsuit, it may be disputed either
    whether certain events have occurred or whether those events result in a present
    obligation. In such cases, an entity determines whether a present obligation exists at
    the reporting date by taking account of all available evidence, including, for example,
    the opinion of experts. The evidence considered includes any additional evidence
    provided by events after the reporting date. On the basis of such evidence:

   (a)   Where it is more likely than not that a present obligation exists at the reporting
                                             10
         date, the entity recognizes a provision (if the recognition criteria are met);
         and
   (b)   Where it is more likely that no present obligation exists at the reporting date,
         the entity discloses a contingent liability, unless the possibility of an outflow of
         resources embodying economic benefits or service potential is remote (see
         paragraph 100).
Past Event

25. A past event that leads to a present obligation is called an obligating event. For an
    event to be an obligating event, it is necessary that the entity has no realistic
    alternative to settling the obligation created by the event. This is the case only:

   (a)   Where the settlement of the obligation can be enforced by law; or
   (b)   In the case of a constructive obligation, where the event (which may be an
         action of the entity) creates valid expectations in other parties that the entity will
         discharge the obligation.

26. Financial statements deal with the financial position of an entity at the end of its
    reporting period and not its possible position in the future. Therefore, no provision is
    recognised for costs that need to be incurred to continue an entity's ongoing activities
    in the future. The only liabilities recognised in an entity's statement of financial
    position are those that exist at the reporting date.

27. It is only those obligations arising from past events existing independently of an entity's
    future actions (that is, the future conduct of its activities) that are recognised as
    provisions. Examples of such obligations are penalties or clean-up costs for unlawful
    environmental damage imposed by legislation on an entity. Both of these
    obligations would lead to an outflow of resources embodying economic benefits or
    service potential in settlement regardless of the future actions of that entity.
    Similarly, an entity would recognize a provision for the decommissioning costs of
    sewage treatment plant, to the extent that the entity is obliged to rectify       damage
    already caused. ASLB 17, ` Property, Plant and Equipment', deals with items,
    including dismantling and site restoring costs, that are included in the cost of an
    asset. In contrast, because of legal requirements, pressure from constituents, or a
    desire to demonstrate community leadership, an entity may intend or need to
    carry out expenditure to operate in a particular way in the future. An example would
    be where an entity decides to fit emission controls on certain of its vehicles, or a local
    body owned laboratory decides to install extraction units to protect employees from
    the fumes of certain chemicals. Because the entities can avoid the future
    expenditure by their future actions -- for example, by changing their method of
    operation, they have no present obligation for that future expenditure, and no
    provision is recognised.

28. An obligation always involves another party to whom the obligation is owed. It is
    not necessary, however, to know the identity of the party to whom the obligation is
    owed -- indeed the obligation may be to the public at large. Because an obligation
    always involves a commitment to another party, it follows that a decision by an entity's
                                              11
   management, governing body, or controlling entity does not give rise to a constructive
   obligation at the reporting date, unless the decision has been communicated
   before the reporting date to those affected by it in a sufficiently specific manner to
   raise a valid expectation in them that the entity will discharge its
   responsibilities.

29. An event that does not give rise to an obligation immediately may do so at a later date,
    because of changes in the law or because an act (for example, a sufficiently specific
    public statement) by the entity gives rise to a constructive obligation. For
    example, when environmental damage is caused by a local body agency, there may
    be no obligation to remedy the consequences. However, the causing of the
    damage will become an obligating event when a new law requires the existing
    damage to be rectified. or when the controlling local body or the individual agency
    publicly accepts responsibility for rectification in a way that creates a constructive
    obligation.

30. Where details of a proposed new law have yet to be finalized, an obligation arises only
    when the legislation is virtually certain to be enacted as drafted. For the purpose of
    this Standard, such an obligation is treated as a legal obligation. However,
    differences in circumstances surrounding enactment often make it impossible to
    specify a single event that would make the enactment of a law virtually certain. In
    many cases, it is not possible to judge whether a proposed new law is virtually
    certain to be enacted as drafted, and any decision about the existence of an
    obligation should await the enactment of the proposed law.

Probable Outflow of Resources Embodying Economic Benefits or Service Potential

31. For a liability to qualify for recognition, there must be not only a present obligation
    but also the probability of an outflow of resources embodying economic benefits or
    service potential to settle that obligation. For the purpose of this Standard, an
    outflow of resources or other event is regarded as probable if the event is more
    likely than not to occur, that is, the probability that the event will occur is greater
    than the probability that it will not. Where it is not probable that a present obligation
    exists, an entity discloses a contingent liability, unless the possibility of an outflow
    of resources embodying economic benefits or service potential is remote (see
    paragraph 100).

32. Where there are a number of similar obligations (for example, a local body
    's obligation to compensate individuals who have received contaminated blood
    from a      hospital owned by the local body), the probability that an outflow will be
    required in settlement is determined by considering the class of obligations as a whole.
    Although the likelihood of outflow for any one item may be small, it may well be
    probable that some outflow of resources will be needed to settle the class of
    obligations as a whole. If that is the case, a provision is recognised (if the other
    recognition criteria are met).




                                             12
Reliable Estimate of the Obligation

33. The use of estimates is an essential part of the preparation of financial
    statements, and does not undermine their reliability. This is especially true in the case
    of provisions, which by their nature are more uncertain than most other assets or
    liabilities. Except in extremely rare cases, an entity will be able to determine a
    range of possible outcomes, and can therefore make an estimate of the obligation
    that is sufficiently reliable to use in recognizing a provision.

34. In the extremely rare case where no reliable estimate can be made, a liability
    exists that cannot be recognised. That liability is disclosed as a contingent liability
    (see paragraph 100).


Contingent Liabilities

35. An entity should not recognize a contingent liability.

36. A contingent liability is disclosed, as required by paragraph 100, unless the possibility
    of an outflow of resources embodying economic benefits or service potential is
    remote.

37. Where an entity is jointly and severally liable for an obligation, the part of the
    obligation that is expected to be met by other parties is treated as a contingent
    liability. For example, in the case of joint venture debt, that part of the obligation that
    is to be met by other joint venture participants is treated as a contingent liability.
    The entity recognizes a provision for the part of the obligation for which an
    outflow of resources embodying economic benefits or service potential is
    probable, except in the rare circumstances where no reliable estimate can be made.

38. Contingent liabilities may develop in a way not initially expected. Therefore,
    they are assessed continually to determine whether an outflow of resources
    embodying economic benefits or service potential has become probable. If it
    becomes probable that an outflow of future economic benefits or service potential
    will be required for an item previously dealt with as a contingent liability, a provision
    is recognised in the financial statements of the period in which the change in
    probability occurs (except in the extremely rare circumstances where no reliable
    estimate can be made). For example, an entity may have breached an
    environmental law, but it remains unclear whether any damage was caused to the
    environment. Where, subsequently it becomes clear that damage was caused and
    remediation will be required, the entity would recognize a provision because an
    outflow of economic benefits is now probable.
Contingent Assets

39. An entity should not recognize a contingent asset.

40. Contingent assets usually arise from unplanned or other unexpected events that (a) are
    not wholly within the control of the entity, and (b) give rise to the possibility of an
                                            13
   inflow of economic benefits or service potential to the entity. An example is a
   claim that an entity is pursuing through legal processes, where the outcome is
   uncertain.

41. Contingent assets are not recognised in financial statements, since this may result in
    the recognition of revenue that may never be realized. However, when the realization
    of revenue is virtually certain, then the related asset is not a contingent asset and its
    recognition is appropriate.

42. A contingent asset is disclosed, as required by paragraph 105, where an inflow of
    economic benefits or service potential is probable.

43. Contingent assets are assessed continually to ensure that developments are
    appropriately reflected in the financial statements. If it has become virtually
    certain that an inflow of economic benefits or service potential will arise and the
    asset's value can be measured reliably, the asset and the related revenue are
    recognised in the financial statements of the period in which the change occurs. If
    an inflow of economic benefits or service potential has become probable, an entity
    discloses the contingent asset (see paragraph 105).
Measurement
Best Estimate

44. The amount recognised as a provision should be the best estimate of the
    expenditure required to settle the present obligation at the reporting date.

45. The best estimate of the expenditure required to settle the present obligation
    is the amount that an entity would rationally pay to settle the obligation at the
    reporting date or to transfer it to a third party at that time. It will often be impossible or
    prohibitively expensive to settle or transfer an obligation at the reporting date.
    However, the estimate of the amount that an entity would rationally pay to settle or
    transfer the obligation gives the best estimate of the expenditure required to settle the
    present obligation at the reporting date.

46. The estimates of outcome and financial effect are determined by the judgment of
    the management of the entity, supplemented by experience of similar transactions
    and, in some cases, reports from independent experts. The evidence considered
    includes any additional evidence provided by events after the reporting date.

47. [Refer to Appendix-1]

48. [Refer to Appendix-1]

49. [Refer to Appendix-1]




                                               14
Risks and Uncertainties

50. The risks and uncertainties that inevitably surround many events and
    circumstances should be taken into account in reaching the best estimate
    of a provision.

51. Risk describes variability of outcome. A risk adjustment may increase the amount at
    which a liability is measured. Caution is needed in making judgments under
    conditions of uncertainty, so that revenue or assets are not overstated and expenses
    or liabilities are not understated. However, uncertainty does not justify the
    creation of excessive provisions or a deliberate overstatement of liabilities. For
    example, if the projected costs of a particularly adverse outcome are estimated on
    a prudent basis, that outcome is not then deliberately treated as more
    probable      than   is realistically the case. Care is needed to avoid duplicating
    adjustments for risk and uncertainty with consequent overstatement of a provision.

52. Disclosure of the uncertainties surrounding the amount of the expenditure is made
    under paragraph 98(b).

53-57 [Refer to Appendix-1]

Future Events

58. Future events that may affect the amount required to settle an obligation
    should be reflected in the amount of a provision where there is sufficient
    objective evidence that they will occur.

59. Expected future events may be particularly important in measuring provisions.
    For example, certain obligations may be index linked to compensate recipients
    for the effects of inflation or other specific price changes. If there is sufficient
    evidence of likely expected rates of inflation, this should be reflected in the amount of
    the provision. Another example of future events affecting the amount of a provision is
    where a local body believes that the cost of cleaning up the tar, ash, and other
    pollutants associated with a gasworks' site at the end of its life will be reduced by
    future changes in technology. In this case, the amount recognised reflects the cost
    that technically qualified, objective observers reasonably expect to be incurred, taking
    account of all available evidence as to the technology that will be available at the time
    of the clean-up. Thus, it is appropriate to include, for example, expected cost
    reductions associated with increased experience in applying existing technology, or
    the expected cost of applying existing technology to a larger or more complex clean-
    up operation than has previously been carried out. However, an entity does not
    anticipate the development of a completely new technology for cleaning up unless it
    is supported by sufficient objective evidence.

60. The effect of possible new legislation which may affect the amount of an existing
    obligation of an entity is taken into consideration in measuring that obligation,
    when sufficient objective evidence exists that the legislation is virtually certain to
    be enacted. The variety of circumstances that arise in practice makes it
                                           15
   impossible to specify a single event that will provide sufficient, objective evidence in
   every case. Evidence is required both (a) of what legislation will demand, and (b) of
   whether it is virtually certain to be enacted and implemented in due course.
   In many cases, sufficient objective evidence will not exist until the new legislation is
   enacted.

Expected Disposal of Assets

61. Gains from the expected disposal of assets should not be taken into account
    in measuring a provision.

62. Gains on the expected disposal of assets are not taken into account in measuring
    a provision, even if the expected disposal is closely linked to the event giving rise to
    the provision. Instead, an entity recognizes gains on expected disposals of assets
    at the time specified by the Accounting Standard for Local Bodies (ASLBs) dealing
    with the assets concerned.

Reimbursements

63. Where some or all of the expenditure required to settle a provision is expected
    to be reimbursed by another party, the reimbursement should be
    recognised when, and only when, it is virtually certain that reimbursement will
    be received if the entity settles the obligation. The reimbursement should be
    treated as a separate asset. The amount recognised for the reimbursement
    should not exceed the amount of the provision.

64. In the statement of income and expenditure, the expense relating to a provision
    may be presented net of the amount recognised for a reimbursement.

65. Sometimes, an entity is able to look to another party to pay part or all of the expenditure
    required to settle a provision (for example, through insurance contracts, indemnity
    clauses, or suppliers' warranties). The other party may either reimburse amounts paid
    by the entity, or pay the amounts directly. For example, an entity may have legal
    liability to an individual as a result of misleading advice provided by its employees.
    However, the entity may be able to recover some of the expenditure from professional
    indemnity insurance.

66. In most cases, the entity will remain liable for the whole of the amount in question, so
    that the entity would have to settle the full amount if the third party failed to pay for
    any reason. In this situation, a provision is recognised for the full amount of the
    liability, and a separate asset for the expected reimbursement is recognised when it
    is virtually certain that reimbursement will be received if the entity settles the liability.

67. In some cases, the entity will not be liable for the costs in question if the third party
    fails to pay. In such a case, the entity has no liability for those costs, and they are not
    included in the provision.


                                               16
68. As noted in paragraph 37, an obligation for which an entity is jointly and severally
    liable is a contingent liability, to the extent that it is expected that the obligation will be
    settled by the other parties.

Changes in Provisions

69. Provisions should 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 should be reversed.

70. [Refer to Appendix-1]

Use of Provisions

71. A provision should be used only for expenditures for which the provision
    was originally recognised.


72. Only expenditures that relate to the original provision are set against it. Setting
    expenditures against a provision that was originally recognised for another purpose
    would conceal the impact of two different events.
Application of the Recognition and Measurement Rules

Future Operating Net Deficits

73. Provisions should not be recognised for net deficits from future operating
    activities.
74. Net deficits from future operating activities do not meet the definition of liabilities in
    paragraph 18 and the general recognition criteria set out for provisions in paragraph
    22.

75. An expectation of net deficits from future operating activities is an indication
    that certain assets used in these activities may be impaired. An entity tests these
    assets for impairment. Guidance on accounting for impairment is found in ASLB 21,
    `Impairment of Non-Cash-Generating Assets'7 or ASLB 26, `Impairment of Cash-
    Generating Assets'8, as appropriate.

Onerous Contracts

76. If an entity has a contract that is onerous, the present obligation (net of
    recoveries) under the contract should be recognised and measured as a
    provision.


7
    Formulation of the proposed ASLB is yet to be undertaken.
8
    Formulation of the proposed ASLB is yet to be undertaken.
                                                           17
77. Paragraph 76 of this Standard applies only to contracts that are onerous. Contracts
    of social obligations are excluded from the scope of this Standard.

78. Many contracts evidencing exchange transactions (for example, some routine
    purchase orders) can be canceled without paying compensation to the other party,
    and therefore there is no obligation. Other contracts establish both rights and
    obligations for each of the contracting parties. Where events make such a contract
    onerous, the contract falls within the scope of this Standard, and a liability exists which
    is recognised. Executory contracts that are not onerous fall outside the scope of this
    Standard.

79. This Standard defines an onerous contract as a contract in which the
    unavoidable costs of meeting the obligations under the contract exceed the economic
    benefits or service potential expected to be received under it, which includes
    amounts recoverable. Therefore, it is the present obligation net of recoveries that is
    recognised as a provision under paragraph 76. The unavoidable costs under a contract
    reflect the least net cost of exiting from the contract, which is the lower of the cost
    of fulfilling it and any compensation or penalties arising from failure to fulfill it.

80. Before a separate provision for an onerous contract is established, an entity recognises
    any impairment loss as per ASLB 17, `Property, Plant and Equipment', that has
    occurred on assets dedicated to that contract.

Restructuring
81. The following are examples of events that may fall under the definition of restructuring:
   (a)   Termination or disposal of an activity or service;
   (b)   The closure of a ward office or termination of activities of a local body's
         department or the relocation of activities from one place to another with in the
         jurisdiction of that local body.;
   (c)    [Refer to Appendix-1]

   (d)   Fundamental reorganizations that have a material effect on the nature and focus of
         the entity's operations.

82. A provision for restructuring costs is recognised only when the general recognition
    criteria for provisions set out in paragraph 22 are met. Paragraphs 83 to 96
    set out how the general recognition criteria apply to restructurings.

83. A constructive obligation to restructure arises only when an entity:
   (a)   Has a detailed formal plan for the restructuring identifying at least:
         (i) The    activity/operating unit       or    part   of     an   activity/operating
             unit concerned;
         (ii) The principal locations affected;

         (iii) The location, function, and approximate number of employees who
               will be compensated for terminating their services;
                                            18
         (iv) The expenditures that will be undertaken; and
         (v) When the plan will be implemented; and
   (b)   Has raised a valid expectation in those affected that it will carry out the
         restructuring by starting to implement that plan or announcing its main
         features to those affected by it.

84. Within the local body,         restructuring   may     occur    at local body level, or it's
    department level.

85. Evidence that a local body has started to implement a restructuring plan would be
    provided, for example, by (a) the public announcement of the main features of the plan,
    (b) the sale or transfer of assets, (c) notification of intention to cancel leases, or (d)
    the establishment of alternative arrangements for clients of services. A public
    announcement of a detailed plan to restructure constitutes a constructive
    obligation to restructure only if it is made in such a way and in sufficient detail (that is,
    setting out the main features of the plan) that it gives rise to valid expectations
    in other parties, such as users of the service, suppliers, and employees (or their
    representatives) that the local body will carry out the restructuring.

86. For a plan to be sufficient to give rise to a constructive obligation when
    communicated to those affected by it, its implementation needs to be planned to
    begin as soon as possible, and to be completed in a timeframe that makes significant
    changes to the plan unlikely. If it is expected that there will be a long delay
    before the restructuring begins, or that the restructuring will take an unreasonably
    long time, it is unlikely that the plan will raise a valid expectation on the part of others
    that the local body is at present committed to restructuring, because the timeframe
    allows opportunities for the local body to change its plans.

87. A decision by management or the governing body to restructure, taken before the
    reporting date, does not give rise to a constructive obligation at the reporting date
    unless the entity has, before the reporting date:
   (a)   Started to implement the restructuring plan; or
   (b)   Announced the main features of the restructuring plan to those affected by it
         in a sufficiently specific manner to raise a valid expectation in them that the
         entity will carry out the restructuring.
   If an entity starts to implement a restructuring plan, or announces its main features to
   those affected, only after the reporting date, disclosure may be required under ASLB
   14, `Events after the Reporting Date', if the restructuring is material and non-
   disclosure could influence the economic decisions of users taken on the financial
   statements.

88. Although a constructive obligation is not created solely by a management or
    governing body decision, an obligation may result from other earlier events
    together with such a decision. For example, negotiations with employee
    representatives for termination payments, or with purchasers for the sale or transfer of
    an operation, may have been concluded subject only to governing body or board
                                            19
      approval. Once that approval has been obtained and communicated to the other
      parties, the entity has a constructive obligation to restructure, if the conditions of
      paragraph 83 are met.

89. In some countries, (a) the ultimate authority for making decisions about a entity
    is vested in a governing body or board whose membership includes
    representatives of interests other than those of management         (for example,
    employees),       or     (b) notification to     these representatives   may   be
    necessary before the governing body or ­competent authority's decision is taken.
    Because a decision by such a governing body or competent authority involves
    communication to these representatives, it may result in a constructive
    obligation to restructure.


      Sale or Transfer of Operations

90. No obligation arises as a consequence of the sale or transfer of an operation
    until the entity is committed to the sale or transfer, that is, there is a binding
    agreement.

91. Even when an entity has taken a decision to sell an operation and announced
    that decision publicly, it cannot be committed to the sale until a purchaser has been
    identified and there is a binding sale agreement. Until there is a binding sale
    agreement, the entity will be able to change its mind, and indeed will have to take
    another course of action if a purchaser cannot be found on acceptable terms. When a
    sale is only part of a restructuring, a constructive obligation can arise for the other
    parts of the restructuring before a binding sale agreement exists.

92. Restructuring within a local body often involves the transfer of operations from
    one controlled entity to another, and may involve the transfer of operations at no
    or nominal consideration. Such transfers will often take place under a government or
    directive of competent authority, and will not involve binding agreements as described
    in paragraph 90. An obligation exists only when there is a binding transfer agreement.
    Even where proposed transfers do not lead to the recognition of a provision, the
    planned transaction may require disclosure under other ASLBs, such as the ASLB
    14, Events after the Reporting Date, and ASLB 20, Related Party Disclosures9.

      Restructuring Provisions

93. A restructuring provision should include only the direct expenditures arising
    from the restructuring, which are those that are both:
      (a)   Necessarily entailed by the restructuring; and
      (b)   Not associated with the ongoing activities of the entity.

94. A restructuring provision does not include such costs as:
      (a)   Retraining or relocating continuing staff; or
9
    The formulation of the ASLB is under formulation.
                                                        20
   (b)   Investment in new systems and distribution networks.
   These expenditures relate to the future conduct of an activity, and are not liabilities
   for restructuring at the reporting date. Such expenditures are recognised on the
   same basis as if they arose independently of a restructuring.

95. Identifiable future operating net deficits up to the date of a restructuring are not
    included in a provision, unless they relate to an onerous contract, as defined in
    paragraph 18.

96. As required by paragraph 61, gains on the expected disposal of assets are not taken
    into account in measuring a restructuring provision, even if the sale of assets is
    envisaged as part of the restructuring.
Disclosure

97. For each class of provision, an entity should disclose:
   (a)   The carrying amount at the beginning and end of the period;
   (b)   Additional provisions made in the period, including increases to existing
         provisions;
   (c)   Amounts used (that is, incurred and charged against the provision)
         during the period;
   (d)   Unused amounts reversed during the period; and
   (e)   [Refer to Appendix-1]


Comparative information is not required.

98. An entity should disclose the following for each class of provision:

   (a)   A brief description of the nature of the obligation and the expected
         timing of any resulting outflows of economic benefits or service potential;
   (b)   An indication of the uncertainties about the amount or timing of those
         outflows. Where necessary to provide adequate information, an entity
         should disclose the major assumptions made concerning future events,
         as addressed in paragraph 58; and
   (c)   The amount of any expected reimbursement, stating the amount of
         any asset that has been recognised for that expected reimbursement.

99. Where an entity elects to recognize in its financial statements
    provisions    for   social   obligations of an entity, it should make the
    disclosures required in paragraphs 97 and 98 in respect of those provisions.

100. Unless the possibility of any outflow in settlement is remote, an entity should
     disclose, for each class of contingent liability at the reporting date, a brief
     description of the nature of the contingent liability and, where practicable:
                                         21
   (a)   An estimate        of    its    financial     effect,measured under paragraphs
         44 to 62;
   (b)   An indication of the uncertainties relating to the amount or timing of any
         outflow; and
   (c)   The possibility of any reimbursement.

101. In determining which provisions or contingent liabilities may be aggregated
     to form a class, it is necessary to consider whether the nature of the items is
     sufficiently similar for a single statement about them to fulfill the requirements of
     paragraphs 98(a) and (b) and 100(a) and (b). Thus, it may be appropriate to treat,
     as a single class of provision, amounts relating to one type of obligation, but it would
     not be appropriate to treat, as a single class, amounts relating to environmental
     restoration costs and amounts that are subject to legal proceedings.

102. Where a provision and a contingent liability arise from the same set of
     circumstances, an     entity makesthe disclosures required by paragraphs
     97, 98 and 100 in a way that shows the link between the provision and the
     contingent liability.

103. An entity may in certain circumstances use external valuation to measure a provision.
     In such cases, information relating to the valuation can usefully be disclosed.

104. The disclosure requirements in paragraph 100 do not apply to contingent liabilities
     that arise from social obligations of an entity (see paragraphs 1(a) and 7­11 for a
     discussion of the exclusion of social obligations from this Standard).

105. Where an inflow of economic benefits or service potential is probable, an
     entity should disclose a brief description of the nature of the contingent
     assets at the reporting date, and, where practicable, an estimate of their
     financial effect, measured using the principles set out for provisions in
     paragraphs 44 to 62.

106. The disclosure requirements in paragraph 105 are only intended to apply to those
     contingent assets where there is a reasonable expectation that benefits will flow to
     the entity. That is, there is no requirement to disclose this information about all
     contingent assets (see paragraphs 39 to 43 for a discussion of contingent
     assets). It is important that disclosures for contingent assets avoid giving
     misleading indications of the likelihood of revenue arising. The contingent asset
     should be quantified, where a reasonable estimate of the same can be made.

107. The disclosure requirements in paragraph 105 encompass contingent assets from
     both exchange and non-exchange transactions. Whether a contingent asset exists in
     relation to taxation revenues rests on the interpretation of what constitutes a
     taxable event. The determination of the taxable event for taxation revenue and its
     possible implications for the disclosure of contingent assets related to taxation
     revenues are to be dealt with as a part of a separate project on non-exchange
     revenue.
                                             22
108. Where any of the information required by paragraphs 100 and 105 is not
     disclosed because it is not practicable to do so, that fact should be stated.

109. In extremely rare cases, disclosure of some or all of the information
     required by paragraphs 97 to 107 can be expected to prejudice
     seriously the position of the entity in a dispute with other parties on the subject
     matter of the provision, contingent liability or contingent asset. In such cases,
     an entity need not disclose the information, but should disclose the general
     nature of the dispute, together with the fact that, and reason why, the
     information has not been disclosed.
Transitional Provisions

110. The effect of adopting this Standard on its effective date (or earlier) should
     be reported as an adjustment to the opening balance of accumulated
     surpluses/(deficits) for the period in which the Standard is first adopted.

111-112. [Refer to appendix-1]




                                          23
                                                                          Appendix -A

Provisions, Contingent Liabilities, Contingent Assets, and
Reimbursements
These Tables accompany, but are not part of ASLB 19.
Provisions and Contingent Liabilities


 Where, as a result of past events, there may be an outflow of resources embodying
 future economic benefits or service potential in settlement of (a) a present
 obligation, or (b) a possible obligation 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.
 There is a present        There is a possible           There is a possible
 obligation that           obligation or a present       obligation or a present
 probably requires an      obligation that m ay, but     obligation where the
 outflow of resources. probably will not,                likelihood of an outflow
                           require an outflow of         of resources is rem ote.
                           resources.
 A provision is recognized No provision is               No provision is
 (paragraph 22).           recognized                    Recognized
                           (paragraph 35).               (paragraph 35).
 Disclosures are required Disclosures are required           No disclosure is required
 for the provision        for the contingent                 (paragraph 100).
 (paragraphs 97and 98). liability (paragraph 100).

A contingent liability also arises in the extremely rare case where there is a liability that
cannot be recognized because it cannot be measured reliably. Disclosures are required for
the contingent liability.




                                             24
Contingent Assets

Where, as a result of past events, there is a possible asset 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.
The inflow of econom ic   The inflow of econom ic     The inflow of econom ic
benefits or service       benefits or service         benefits or service
potential is virtually    potential is probable,      potential is not
certain.                  but not virtually           probable.
                          certain.
 The asset is not          No asset is recognized      No asset is recognized
                           (paragraph 39).             (paragraph 39).

  contingent
 (paragraph 41).           Disclosures are required    No disclosure is required
                           (paragraph 105).            (paragraph 105).




                                        25
Reimbursements

Some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party.

The entity has no             The obligation for the        The obligation for the
obligation for the part       am ount expected to be        amount expected to be
of the expenditure to be      reimbursed remains            reimbursed remains
reim bursed by the other      w ith the entity, and it is   with the entity, and the
party.                        virtually certain that        reimbursement is not
                              reimbursement will be         virtually certain if the
                              received if the entity        entity settles the
                              settles the provision.        provision.
The entity has no liability   The reimbursement is          The expected
for the amount to be          recognized as a separate      reimbursement is not
reimbursed                    asset in the financial        recognized as an asset
(paragraph 67).               position, and may be offset   (paragraph 63).
                              against the expense in the
                              statement of financial
                              perform ance.
                              The amount recognized
                              for the expected
                              reimbursement does not
                              exceed the liability
                              (paragraphs 63 and 64).
No disclosure is required.    The reimbursement is          The expected
                              disclosed, together with      reimbursement is
                              the amount recognized         disclosed
                              for the reimbursement         (paragraph 98(c)).
                              (paragraph 98(c)).




                                             26
                                                                          Appendix -B
Illustrative Decision Tree

This decision tree accompanies, but is not part of ASLB 19.
Note: In some cases, it is not clear whether there is a present obligation. In these cases, a
past event is deemed to give rise to a present obligation if, taking account of all available
evidence, it is more likely than not that a present obligation exists at the reporting date
(paragraph 23 of this Standard).


            Start




          Present
       obligation as              No                Possible               No
       a result of an                              Obligation?
         obligating
           event



    Yes                                           Yes



          Probable               No                                       Yes
          Outflow?                                  Remote?




      Yes
                                                   No

                              No (rare)
           Reliable
          estimate?




    Yes

                                             27
                                            Disclose
                                                                          Appendix -C
Implementation Guidance
This guidance accompanies, but is not part of, ASLB 19.
Recognition

IG1. All the entities in the examples have a reporting date of March 31. In all cases, it is
     assumed that a reliable estimate can be made of any outflows expected. In some
     examples, the circumstances described may have resulted in impairment of the
     assets ­ this aspect is not dealt with in the examples.


IG2. The cross-references provided in the examples indicate paragraphs of this Standard
     that are particularly relevant. This guidance should be read in the context of the full
     text of this Standard.

IG3. [Refer to appendix-1]

IG4. [Refer to appendix-1]

Contaminated Land--Legislation Virtually Certain to be Enacted
IG5. A local body owns a warehouse on land near a port. The local body has retained
     ownership of the land because it may require the land for future expansion of its
     operations. For the past ten years, the property had been leased out to a group of
     farmers as a storage facility for agricultural chemicals. The government announces its
     intention to enact environmental legislation requiring property owners to accept
     liability for environmental pollution, including the cost of cleaning-up contaminated
     land. As a result, the local body introduces a hazardous chemical policy and begins
     applying the policy to its activities and properties. At this stage it becomes apparent
     that the agricultural chemicals have contaminated the land surrounding the
     warehouse. The local body has no recourse against the farmers or its insurance
     company for the clean-up costs. At March 31, 2013 it is virtually certain that a draft
     law requiring a clean-up of land already contaminated will be enacted shortly after the
     year end.

     Analysis

     Present obligation as a result of a past obligating event ­ The obligating event is the
     contamination of the land because of the virtual certainty of legislation requiring the




                                            28
     clean-up.

     An outflow of resources embodying economic benefits or service potential in
     settlement ­ Probable.

     Conclusion
     A provision is recognized for the best estimate of the costs of the clean-up (see
     paragraphs 22 and 30).

Contamination and Constructive Obligation

IG6. A local body has a widely published environmental policy in which it undertakes to
     clean up all contamination that it causes. The local body has a record of honoring this
     published policy. There is no environmental legislation in place in the jurisdiction.
     During the course of travelling, an oil tanker vessel carrying oil is damaged and leaks
     a substantial amount of oil. The local body agrees to pay for the costs of the
     immediate clean-up.

      Analysis

     Present obligation as a result of a past obligating event ­ The obligating event is the
     contamination of the environment, which gives rise to a constructive obligation
     because the policy and previous conduct of the local body has created a valid
     expectation that the local body will clean up the contamination.

     An outflow of resources embodying economic benefits or service potential in
     settlement ­ Probable.

     Conclusion

     A provision is recognized for the best estimate of the costs of the clean-up (see
     paragraphs 22 and 30).

Gravel Quarry

IG7. A local body operates a gravel quarry on land that it leases on a commercial basis
     from a private sector company. The gravel is used for the construction and
     maintenance of roads. The agreement with the landowners requires the local body to
     restore the quarry site by removing all buildings, reshaping the land, and replacing all
     topsoil. 60% of the eventual restoration costs relate to the removal of the quarry
     buildings and restoration of the site, and 40% arise through the extraction of gravel. At
     the reporting date, the quarry buildings have been constructed, and excavation of the
     site has begun but no gravel has been extracted.
                                              29
     Analysis
     Present obligation as a result of a past obligating event ­ The construction of buildings
     and the excavation of the quarry creates a legal obligation under the terms of the
     agreement to remove the buildings and restore the site, and is thus an obligating
     event. At the reporting date, however, there is no obligation to rectify the damage that
     will be caused by extraction of the gravel.
     An outflow of resources embodying economic benefits or service potential in
     settlement ­ Probable.
     Conclusion
     A provision is recognized for the best estimate of 60% of the eventual costs that relate
     to the removal of the buildings and restoration of the site (see paragraph 22). These
     costs are included as part of the cost of the quarry. The 40% of costs that arise
     through the extraction of gravel are recognized as a liability progressively when the
     gravel is extracted.

IG8. [Refer to appendix-1]

Closure of a Division--No Implementation before Reporting Date
IG9. On 12 December 2012, a local body decides to close down its one of the ward offices.
     The decision was not communicated to any of those affected before the reporting date
     ( March 13, 2013), and no other steps were taken to implement the decision.
     Analysis
     Present obligation as a result of a past obligating event ­ There has been no
     obligating event and so there is no obligation.
     Conclusion
     No provision is recognized (see paragraphs 22 and 83).

Outsourcing of a Division--Implementation Before the Reporting Date
IG10.On December 12, 2012, a local body decided to outsource a division of a local body
     department. On December 20, 2012, a detailed plan for outsourcing the division was
     agreed by the local body, and redundancy notices were sent to the staff of the
     division.
     Analysis
     Present obligation as a result of a past obligating event ­ The obligating event is the
     communication of the decision to employees, which gives rise to a constructive
     obligation from that date, because it creates a valid expectation that the division will be
     outsourced.

                                              30
    An outflow of resources embodying economic benefits or service potential in
    settlement ­ Probable.
    Conclusion
    A provision is recognized at March 31, 2013 for the best estimate of the costs of
    outsourcing the ward office (see paragraphs 22 and 83).

Legal Requirement to Fit Air Filters

IG11.Under new legislation, a local body is required to fit new air filters to its public
     buildings by 30 June 2013. The entity has not fitted the air filters.
    Analysis
    (a)    At the reporting date of March 31, 2013

    Present obligation as a result of a past obligating event ­ There is no obligation
    because there is no obligating event either for the costs of fitting air filters or for fines
    under the legislation.
    Conclusion
    No provision is recognized for the cost of fitting the filters (see paragraphs 22 and 25­
    27).
    Analysis
     (b)   At the reporting date of March 31, 2014

    Present obligation as a result of a past obligating event ­ There is still no obligation for
    the costs of fitting air filters because no obligating event has occurred (the fitting of the
    filters). However, an obligation might arise to pay fines or penalties under the
    legislation because the obligating event has occurred (the non-compliance of the
    public buildings).

    An outflow of resources embodying economic benefits or service potential in
    settlement ­ Assessment of probability of incurring fines and penalties for non-
    compliance depends on the details of the legislation and the stringency of the
    enforcement regime.

    Conclusion
    No provision is recognized for the costs of fitting air filters. However, a provision is
    recognized for the best estimate of any fines and penalties that are more likely than
    not to be imposed (see paragraphs 22 and 25­27).



                                              31
Staff Retraining as a Result of Changes in the Property Tax System

IG12.The local body introduces a number of changes to the property tax system. As a
     result of these changes, the local body X (reporting entity) will need to retrain a large
     proportion of its administrative and compliance staff in order to ensure continued
     compliance with property tax regulations. At the reporting date, no retraining of staff
     has taken place.
     Analysis
     Present obligation as a result of a past obligating event ­ There is no obligation
     because no obligating event (retraining) has taken place.
     Conclusion
     No provision is recognized (see paragraphs 22 and 25­27).


An Onerous Contract
IG13. A hospital laundry operates from a building that the hospital (the reporting entity) has
      leased under an operating lease. During March 2014, the laundry relocates to a new
      2013, the laundry relocates to a new building. The lease on the old building continues
      for the next four years; it cannot be canceled. The hospital has no alternative use for
      the building and the building cannot be re-let to another user.
     Analysis
     Present obligation as a result of a past obligating event ­ The obligating event is the
     signing of the lease contract, which gives rise to a legal obligation.

     An outflow of resources embodying economic benefits or service potential in
     settlement ­ When the lease becomes onerous, an outflow of resources embodying
     economic benefits is probable. (Until the lease becomes onerous, the hospital
     accounts for the lease under ASLB 13, Leases).
     Conclusion
     A provision is recognised for the best estimate of the unavoidable lease payments
     (see paragraphs 13(b), 22 and 76).

A Single Guarantee

IG14.During F.Y. 2013-14, a local body gives a guarantee of certain borrowings of a private
     sector operator providing public services for a fee, whose financial condition at that
     time is sound. During F.Y. 2013-14, the financial condition of the operator
     deteriorates and, at June 30, 2013, the operator files for protection from its creditors.

     Analysis
                                              32
     (a)   At March 31, 2013
     Present obligation as a result of a past obligating event ­ The obligating event is the
     giving of the guarantee, which gives rise to a legal obligation.

     An outflow of resources embodying economic benefits or service potential in
     settlement ­ No outflow of benefits is probable at March 31, 2013.
     Conclusion
     No provision is recognized (see paragraphs 22 and 31). The guarantee is disclosed as
     a contingent liability unless the probability of any outflow is regarded as remote (see
     paragraph 100).
     Analysis
     (b) At March 31, 2014
     Present obligation as a result of a past obligating event ­ The obligating event is the
     giving of the guarantee, which gives rise to a legal obligation.

     An outflow of resources embodying economic benefits or service potential in
     settlement ­ At March 31, 2014, it is probable that an outflow of resources embodying
     economic benefits or service potential will be required to settle the obligation.
     Conclusion
     A provision is recognized (see paragraphs 22 and 31).Note: This example deals with a
     single guarantee. If an entity has a portfolio of similar guarantees, it will assess that
     portfolio as a whole in determining whether an outflow of resources embodying
     economic benefit is probable (see paragraph 32). Where an entity gives guarantees in
     exchange for a fee, revenue is recognized in accordance with ASLB 9, "Revenue
     from Exchange Transactions".
A Court Case
IG15. In a school (the reporting entity) run by local body in January 2013, ten students died,
      possibly as a result of food poisoning from food provided under mid-day meal
      scheme. Legal proceedings are started seeking damages from the entity, but it
      disputes liability. Up to the date of authorization of the financial statements for the
      year to March 31, 2013 for issue, the entity's lawyers advise that it is probable that
      the entity will not be found liable. However, when the entity prepares the financial
      statements for the year to March 31, 2014, its lawyers advise that, owing to
      developments in the case, it is probable that the entity will be found liable.
     Analysis

     (a)   At March 31, 2013

     Present obligation as a result of a past obligating event ­ On the basis of the evidence
                                              33
    available when the financial statements were approved, there is no obligation as a
    result of past events.
    Conclusion
    No provision is recognized by the school (see paragraphs 23 and 24). The matter is
    disclosed as a contingent liability unless the probability of any outflow is regarded as
    remote (paragraphs 100 and 109).
    Analysis
    (b) At March 31, 2014
    Present obligation as a result of a past obligating event ­ On the basis of the evidence
    available, there is a present obligation.

    An outflow of resources embodying economic benefits or service potential in
    settlement ­ Probable.

    Conclusion

    A provision is recognized for the best estimate of the amount to settle the obligation
    (paragraphs 22­24 and 109).

Repairs and Maintenance

IG16. Some assets require in addition to routine maintenance, substantial expenditure
      every few years for major refits or refurbishment and the replacement of major
      components. ASLB 17, Property, Plant, and Equipment, gives guidance on allocating
      expenditure on an asset to its component parts where these components have
      different useful lives or provide benefits in a different pattern.

Refurbishment Costs--No Legislative Requirement

IG17.A furnace has a lining that needs to be replaced every five years for technical
     reasons. At the reporting date, the lining has been in use for three years.
    Analysis
    Present obligation as a result of a past obligating event ­ There is no present
    obligation.

    Conclusion
    No provision is recognized (see paragraphs 22 and 25­27).
    The cost of replacing the lining is not recognized because, at the reporting date, no
    obligation to replace the lining exists independently of the entity's future actions­even
    the intention to incur the expenditure depends on the entity deciding to continue
    operating the furnace or to replace the lining. Instead of a provision being recognized,
                                            34
     the depreciation of the lining takes account of its consumption, that is, it is depreciated
     over five years. The re-lining costs then incurred are capitalized, with the consumption
     of each new lining shown by depreciation over the subsequent five years.

Refurbishment Costs--Legislative Requirement

IG18.Replacement of a major part of oil tanker is required by law to overhaul it once every
     three years.
     Analysis
     Present obligation as a result of a past obligating event ­ There is no present
     obligation.

     Conclusion
     No provision is recognized (see paragraphs 22 and 25­27).
     The costs of overhauling oil tanker are not recognized as a provision for the same
     reasons as the cost of replacing the lining is not recognized as a provision in Example
     IG17. Even a legal requirement to overhaul does not make the costs of overhaul a
     liability, because no obligation exists to overhaul the oil tanker independently of the
     entity's future actions ­ the entity could avoid the future expenditure by its future
     actions, for example by selling the oil tanker.

     Disclosures
     An example of the disclosure required by paragraph 98 is given below.

Decommissioning Costs

IG20.In 2013, a local body- uses a waste disposal and recycling plant , recognizes a
      provision for decommissioning costs of Rs. 100 lakhs. The provision is estimated
      using the assumption that decommissioning will take place in 20-30 years' time.. The
      following information is disclosed:
     A provision of Rs. 100 lakhs has been recognized for decommissioning costs. These
     costs are expected to be incurred between 2033 and 2043.

Disclosure Exemption

     An example is given below of the disclosures required by paragraph 109 where some
     of the information required is not given because it can be expected to prejudice
     seriously the position of the entity.
IG21.A local body research agency is involved in a dispute with a company, which is
     alleging that the research agency has infringed copyright in its use of genetic
     material, and is seeking damages of Rs. 100 million. The research agency
                                              35
recognizes a provision for its best estimate of the obligation, but discloses none of the
information required by paragraphs 97 and 98 of the Standard. The following
information is disclosed:
Litigation is in process against the agency relating to a dispute with a company that
alleges that the agency has infringed patents, and is seeking damages of Rs. 100
million. The information usually required by ASLB 19, Provisions, Contingent
Liabilities and Contingent Assets, is not disclosed, on the grounds that it can be
expected to prejudice seriously the outcome of the litigation. The management is of
the opinion that the claim can be successfully defended by the agency.




                                        36
                                                                              Appendix 1

Note: This Appendix is not a part of the Accounting Standard for Local Bodies. The
purpose of this Appendix is only to bring out the major differences, if any, between
Accounting Standard for Local Bodies (ASLB) 19 and the corresponding International
Accounting Standard (IPSAS) 19, `Provisions, Contingent Liabilities and Contingent Assets'

      Comparison with IPSAS 19, `Provisions, Contingent Liabilities and Contingent
      Assets'

      IPSAS 19 clearly mentions provisions, contingent liabilities and contingent assets
      arising from insurance contracts within the scope of the relevant international or
      national accounting standard dealing with insurance contracts and those arising in
      relation to income taxes or income tax equivalents are excluded from the scope of
      this standard. However, the same has been deleted in exposure draft ASLB 19.

      As per IPSAS 19, where the effect of the time value of money is material, the
      amount of a provision shall be discounted at a pre-tax discount rate and certain
      disclosures are required to be made in this regard. Whereas, exposure draft ASLB
      19 does not require discounting of the provisions keeping in view that the Local
      Bodies in India are at very initial stages of implementation of accrual basis of
      accounting.

      IPSAS 19 does not apply to financial instruments (including guarantees) that are
      within the scope of IPSAS 29, `Financial Instruments: Recognition and
      measurements' whereas exposure draft ASLB 19 applies to financial instruments
      (including guarantees) that are not carried at fair value but excludes that are carried
      at fair value.

      Some examples in the exposure draft Standard and in implementation guidance
      have been deleted and some have been modified to better address the
      circumstances of the local bodies.

      Definitions of `Obligation', `Present Obligation' and `Possible Obligation' have been
      included in exposure draft ASLB 19.

      In the exposure draft ASLB 19 the term `social benefits' has been modified as `social
      obligations'. In this regard, the IPSAS 19 excludes provisions, contingent liabilities
      and contingent assets arising from social benefits provided by an entity for which it
      does not receive consideration that is approximately equal to the value of goods and
      services provided directly in return from the recipients of those benefits from the
      scope of the Standard. Whereas in exposure draft ASLB 19 the said exclusion has
      been modified as `provisions, contingent liabilities and contingent assets arising from
      social obligations of an entity for which it does not receive any consideration or
      receives a nominal consideration.


                                            37
   Exposure draft ASLB 19 uses different terminology, in certain instances, from
   existing IPSAS 19, for example, use of `Statement of Income and Expenditure' in
   exposure draft ASLB 19. The equivalent term in IPSAS 29 is `statement of Financial
   Performance'.

   In order to simplify the guidance with respect to the `best estimate', the
   `requirements of weighting all possible outcomes by their associated probabilities in
   case of large populations of item' and `considering all possible outcomes along with
   most likely outcome in case of a single obligation', have been removed from the
   exposure draft ASLB 19.

   In IPSAS 19, under transitional provisions entities are encouraged, but not
   required, to (a.) adjust the opening balance of accumulated surpluses/(deficits) for
   the earliest period presented, and (b.) to restate comparative information.
   If comparative information is not restated, this fact should be disclosed. The
   aforesaid transitional provisions have been deleted in exposure draft ASLB 19.

   Paragraphs relating to effective date have been removed as exposure ASLB 19
   would become mandatory for Local Bodies in a state from the date specified by the
   State Government concerned.

   Consequential changes resulting from above departures have been made in the
   exposure draft ASLB 19. However, paragraph numbers have been retained in order
   to maintain consistency with IPSAS 19.




                                        38
                                                                               Appendix 2

Note: This Appendix is not a part of the Accounting Standard for Local Bodies. The
purpose of this Appendix is only to bring out the major differences, if any, between
Accounting Standard for Local Bodies (ASLB) 19 and the corresponding existing AS 29,
`Provisions, Contingent Liabilities and Contingent Assets'

Major differences between Existing AS 29 and Exposure Draft ASLB 19, `Provisions,
Contingent Liabilities and Contingent Assets'

   The scope of ASLB 19 clarifies that it does not apply to provisions, contingent liabilities
   and contingent assets arising from social obligations of an entity. ASLB 19 also
   provides that if the entity elects to recognise provisions for social obligations, certain
   disclosures are required to be made. Existing AS 29 does not deal with the same.

   AS 29 excludes provisions, contingent liabilities and contingent assets arising in
   insurance enterprises from contracts with policy-holders from the scope of this
   standard. However, the said exclusion is not there in the exposure draft ASLB 19 as
   this is not relevant in context of local bodies.

   The existing AS 29 prohibits disclosure of a contingent asset in the financial statements
   but the same is usually disclosed in the report of the approving authority but whereas
   exposure draft ASLB 19 requires disclosure of contingent assets in the financial
   statements when an inflow of economic benefits is probable.

   Unlike the existing AS 29, Exposure Draft ASLB 19 requires creation of provisions in
   respect of constructive obligation also. Consequential changes resulted from the same
   has also been made in the exposure draft ASLB.

   Exposure Draft ASLB 19 uses different terminology, in certain instances, from existing
   AS 29. For example use of `Statement of Income and expenditure' and `net deficit' in
   exposure draft ASLB 19. The equivalent term in existing AS 29 is `statement of profit
   and loss' and `loss' respectively.

   Exposure Draft ASLB 19 makes it clear that before a separate provision for an onerous
   contract is established, an entity should recognise any impairment loss that has
   occurred on assets dedicated to that contract in accordance with ASLB 17, `Property,
   Plant and Equipment'. There is no such specific provision in the existing AS 29. The
   exposure draft ASLB 19 also provides additional guidance on the subject.

   Examples and Implementation Guidance in the exposure draft ASLB 19 are more
   reflective of the circumstances of the Local Bodies.


                                             39

 
 
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