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
|
