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  • 46. IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets.doc 08/07/2008 Page 1 of

    IPSAS 19: PROVISIONS, CONTINGENT LIABILITIES and CONTINGENT ASSETS Executive Summary The objective of IPSAS 19 Provisions Contingent Liabilities and Contingent Assets is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. However, the Standard also represents important guidance for determining recognition of liabilities more generally.

    At a general level, a liability is a present obligation as a result of past events. Settlement is expected to result in an outflow of resources (payment).

    Provisions are a subset of liabilities. A provision is a liability of uncertain timing or amount, and is therefore recognized. Uncertainties in relation to timing or amount are considered to be largely a measurement issue, where the Standard provides examples of how to address these issues, including present value techniques where timing impacts are material.

    A contingent liability occurs when the present obligation as a result of past events or the outflow of resources is more than remotely possible, but not probable, where the outcome will be confirmed by a future event. In the extremely rare instance where a provision cannot be reliably estimated, it is also treated as a contingent liability. Contingent liabilities are not recognized, but are disclosed.

    IPSAS 19 therefore deals with both sides of the liability recognition boundary for areas within its scope, and sets out the disclosures necessary to provide a complete and transparent picture to users (e.g. indication of uncertainties and assumptions used).

    IPSAS 19 also addresses contingent assets. A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by a future event. Contingent assets are not recognized, but are disclosed if inflow of economic benefits is probable.

    Compared to UNSAS, recognition, measurement and disclosure guidance in relation to the areas addressed by IPSAS 19 is considerably more detailed. In particular, IPSAS 19 tightens the recognition criteria in relation to when a liability is recognized. The Standard aims to ensure that only genuine obligations, including constructive obligations, are recognized in the financial statements items such as planned future expenditure (e.g. some unliquidated obligations) are excluded.

    A specific area of impact to United Nations System organizations will be the IPSAS 19 guidance on restructuring provisions examples of restructuring expenses captured by this guidance are provided in Appendix B.

    Specific guidance around present valuing provisions is provided in Appendix D, with example disclosures in Appendices C and E.

  • 46. IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets.doc 08/07/2008 Page 2 of

    Table of Contents This Guidance is Subordinate to the Standard........................................................................3 Overview of IPSAS 19 Requirements ...................................................................................3

    UNSAS Comparison.........................................................................................................3 International Financial Reporting Standards (IFRS) Guidance is relevant...........................3

    Scope Exclusions of IPSAS 19.............................................................................................3 Definitions of Liabilities and Provisions ...............................................................................4

    Liabilities........................................................................................................................4 Comparison between IPSAS 19 and UNSAS..................................................................5

    Provisions.......................................................................................................................6 Meaning of Provision - Liability versus Contra-Asset .............................................6

    Recognition of Provisions ....................................................................................................6 Present Obligation...........................................................................................................7 Past Event.......................................................................................................................7 Probable Outflow............................................................................................................8 Reliable Estimate.............................................................................................................8 Onerous Contracts and Restructuring Provisions...............................................................8

    Measurement of Provisions ..................................................................................................9 Measure Provisions at their Best Estimate.....................................................................9 Use of Present Value......................................................................................................10

    Discount Rate and Other Valuation Variables...............................................................10 Treatment of Reimbursements and Changes to Provisions ................................................10

    Disclosures for Provisions ..................................................................................................11 Contingent Liabilities ........................................................................................................11

    Contingent Liabilities must be Disclosed .........................................................................12 Contingent Assets..............................................................................................................12

    Disclosure of Contingent Assets only when Inflow is Probable .......................................12 General Points on Disclosures ............................................................................................13 Transitional Provis ions ......................................................................................................13 Implementation .................................................................................................................13

    Present Valuing Provisions.............................................................................................13 More Generally .............................................................................................................14

    APPENDIX A: Differences between IAS 37 and IPSAS 19 .................................................15 APPENDIX B: Costs that should be Included and Excluded from a Restructuring Provision ..16 APPENDIX C: 2007 OECD Financial Statements ...............................................................17 APPENDIX D: Example of Provisioning using Present Values ............................................18 APPENDIX E: 2006 EC Financial Statements.....................................................................19

  • 46. IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets.doc 08/07/2008 Page 3 of

    IPSAS 19: PROVISIONS, CONTINGENT LIABILITIES, and CONTINGENT ASSETS June 2008

    This Guidance is Subordinate to the Standard

    1 The final authority on IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets requirements is IPSAS 19. This guidance aims to support understanding of the requirements of IPSAS 19. If a conflict between the guidance and the Standard is identified, the requirements of the Standard apply.

    Overview of IPSAS 19 Requirements

    2 Different kinds of liabilities have differing implications. Some categorization and explanation of liabilities is therefore important to provide a complete and transparent picture to stakeholders, for example to indicate the timing of related outflows, or the extent of certainty in relation to the incurrence or measurement of the liability.

    3 The IPSAS 19 guidance on provisions represents the boundary of liability (and therefore expense) recognition for areas within its scope; its guidance on contingent liabilities covers events that fall beyond the boundary of liability recognition but nevertheless require disclosure given their potential economic impact on the organization. Contingent assets are also canvassed.

    UNSAS Comparison 4 Compared to United Nations System Accounting Standards (UNSAS), recognition, measurement and disclosure guidance in relation to the areas addressed by IPSAS 19 is considerably more detailed. In particular, IPSAS 19 tightens the recognition criteria in relation to when a liability is recognized, and takes into account constructive obligations. The Standard aims to ensure that only genuine obligations, including constructive obligations, are recognized in the financial statements items such as planned future expenditure (e.g. some unliquidated obligations) are excluded. The IPSAS 19 meaning of the word obligation therefore is significantly different to its current meaning in UNSAS, and organizations will need to reconsider the use of this term in other contexts such as budget related materials.

    International Financial Reporting Standards (IFRS) Guidance is relevant 5 IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets is drawn primarily from IAS 37, Provisions, Contingent Liabilities and Contingent Assets (1998). The main difference between IPSAS 19 and IAS 37 relate to differen