|Financial Reporting Standard 137 |
FRS 137 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets, except:
The Standard defines provisions as liabilities of uncertain timing or amount. A provision should be recognised when, and only when:
The Standard defines a constructive obligation as an obligation that derives from an entity's actions where:
In rare cases, for example in a law suit, it may not be clear whether an entity has 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 balance sheet date. An entity recognises a provision for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, in other words, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time.
The Standard requires that an entity should, in measuring a provision:
An entity may expect reimbursement of some or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers' warranties). An entity should:
Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed.
A provision should be used only for expenditures for which the provision was originally recognised.
Provisions - specific applications
The Standard explains how the general recognition and measurement requirements for provisions should be applied in three specific cases: future operating losses; onerous contracts; and restructurings.
Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an entity tests these assets for impairment under FRS 136 Impairment of Assets.
If an entity has a contract that is onerous, the present obligation under the contract should be recognised and measured as a provision. An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
The Standard defines a restructuring as a programme that is planned and controlled by management, and materially changes either:
A provision for restructuring costs is recognised only when the general recognition criteria for provisions are met. In this context, a constructive obligation to restructure arises only when an entity:
A management or board decision to restructure does not give rise to a constructive obligation at the balance sheet date unless the entity has, before the balance sheet date:
Where a restructuring involves the sale of an operation, no obligation arises for the sale until the entity is committed to the sale, ie there is a binding sale agreement.
A restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both:
The Standard defines a contingent liability as:
An entity should not recognise a contingent liability. An entity should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
The Standard defines a contingent asset as 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. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.
An entity should not recognise a contingent asset. A contingent asset should be disclosed where an inflow of economic benefits is probable.
When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
The Standard becomes operative for annual financial statements covering periods beginning on or after 1 July 2007. Earlier application is encouraged.