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  • Accounting Standard AASB 1044October 2001

    Provisions, ContingentLiabilities andContingent Assets

  • AASB 1044 2

    Obtaining a Copy of this Accounting StandardCopies of this Standard are available for purchase from the AustralianAccounting Standards Board by contacting:

    The Customer Service OfficerAustralian Accounting Standards BoardLevel 3530 Collins StreetMelbourne Victoria 3000AUSTRALIA

    Phone: (03) 9617 7637Fax: (03) 9617 7687E-mail: publications@aasb.com.auWeb site: www.aasb.com.au

    Other enquiries:

    Phone: (03) 9617 7600Fax: (03) 9617 7608E-mail: standard@aasb.com.au

    COPYRIGHT

    2001 Australian Accounting Standards Board. The copying of thisStandard is only permitted in certain circumstances. Enquiries should bedirected to the Australian Accounting Standards Board.

    ISSN 1036-4803

  • AASB 1044 3 CONTENTS

    CONTENTS

    MAIN FEATURES OF THE STANDARD ... page 6Section and page number

    GENERAL1 Application 82 Operative Date 103 Purpose of Standard 11

    Liabilities and Provisions 11Distinction between Provisions and Other

    Liabilities 11Contingent Liabilities 12Present Obligation 13Decision Flow Chart 16Contingent Assets 17Decision Flow Chart 18

    4 Existence of Provisions 19Present Obligation 19

    5 Recognition of Provisions 19Probable Future Sacrifice of Economic

    Benefits 20Reliable Measurement 20

    6 Recoveries 217 Contingent Liabilities and Contingent

    Assets 228 Measurement of Provisions 24

    Best Estimate 24Present Value 26Discount Rate 27Future Events 28Expected Disposal of Assets 28

  • AASB 1044 4 CONTENTS

    9 Review of Provisions and Adjustments totheir Carrying Amounts 29

    SPECIFIC APPLICATIONS10 Future Operating Losses (Deficits) 2911 Onerous Contracts 3012 Restructuring 31

    Provisions for Restructurings RecognisedOther Than as a Part of an Acquisitionof an Entity or Operation 31

    Examples of Restructurings 32Recognition of Provisions for

    Restructurings 33Costs Included in Provisions for

    Restructurings 35Provisions for Restructurings Recognised as

    a Part of an Acquisition of an Entity orOperation 36

    13 Dividends 40

    DISCLOSURES14 Disclosures 41

    Provisions 41Provisions for Certain Restructurings and

    Liabilities for Certain TerminationBenefits 41

    Contingent Liabilities and ContingentAssets 42

    Disclosure Exemption 43

    OTHER REQUIREMENTS15 Transitional Arrangements 4416 Definitions 45

    Annual Reporting Period 50

  • AASB 1044 5 CONTENTS

    APPENDICES1 Summary of Main Requirements 512 Examples of Applying the Criteria for the

    Recognition of Provisions 543 Illustrations of Disclosures 63

    CONFORMITY WITH INTERNATIONAL AND NEWZEALAND ACCOUNTING STANDARDS 65DEVELOPMENT OF THE STANDARD 71

    Defined words are italicised each time they appear. Thedefinitions are in Section 16. Standards are printed in bold typeand commentary in light type.

  • AASB 1044 6 FEATURES

    MAIN FEATURES OF THE STANDARDThe Standard:

    (a) defines provisions and, with certain exceptions, specifies thecriteria for their recognition in the statement of financial position;

    (b) specifies recognition criteria and presentation requirements forrecoveries receivable from third parties in respect of provisions;

    (c) defines contingent liabilities and contingent assets as particularitems that are not recognised in the statement of financial positionand requires their disclosure;

    (d) specifies measurement requirements for provisions, recoveriesreceivable, contingent liabilities and contingent assets;

    (e) requires estimated cash flows used to measure provisions, recoveriesreceivable, contingent liabilities and contingent assets to bediscounted to their present value;

    (f) requires the pre-tax rate that reflects current market assessments ofthe time value of money and the risks specific to the liability (to theextent risks are not reflected in the future cash flow estimates) to beused in determining the present value of provisions;

    (g) prohibits providing for future operating losses (deficits);

    (h) requires provisions to be recognised for the net amount of theestimated loss (deficit) expected to arise under onerous contracts;

    (i) specifies the conditions under which provisions for restructurings(including restructurings occurring as a consequence of anacquisition of an entity or operation) are recognised and the coststhat are included in such provisions. The requirements in relation tothe recognition of provisions for restructurings recognised as a partof an acquisition of an entity or operation, including the reliefprovided by paragraph 12.3(b) (the so-called three-month window),will be reviewed when International Accounting Standard IAS 22Business Combinations is reviewed by the InternationalAccounting Standards Board;

    (j) requires liabilities to be recognised for the entire amount ofdeclared, determined or publicly recommended dividends thatremain undistributed at the reporting date, regardless of the extent towhich they are expected to be paid in cash;

  • AASB 1044 7 FEATURES

    (k) prohibits the recognition of dividends as liabilities where they werenot declared, determined or publicly recommended on or before thereporting date; and

    (l) requires various disclosures about provisions, recoveries receivable,contingent liabilities and contingent assets.

  • AASB 1044 8

    ACCOUNTING STANDARD AASB 1044

    The Australian Accounting Standards Board makes Accounting StandardAASB 1044 Provisions, Contingent Liabilities and Contingent Assetsunder section 334 of the Corporations Act 2001.

    F. K. AlfredsonDated 25 October 2001 Chair AASB

    ACCOUNTING STANDARD

    AASB 1044 PROVISIONS, CONTINGENTLIABILITIES AND CONTINGENT ASSETS

    GENERAL

    1 Application1.1 This Standard applies to:

    (a) each entity that is required to prepare financial reportsin accordance with Part 2M.3 of the Corporations Actand that is a reporting entity;

    (b) general purpose financial reports of each other reportingentity; and

    (c) financial reports that are, or are held out to be, generalpurpose financial reports.

    1.2 Subject to paragraph 1.3, this Standard applies to all provisions,recoveries receivable from third parties in relation to provisions,contingent liabilities and contingent assets.

    1.3 This Standard does not apply to:

    (a) financial liabilities carried at fair value, other thanderivatives;

  • AASB 1044 9

    (b) derivatives other than financial guarantee contracts(including letters of credit) that provide for payments tobe made if the debtor fails to make payment when due;

    (c) provisions associated with the retirement or disposal oflong-lived assets;

    (d) employee benefits, except for disclosures required byparagraphs 14.3 to 14.5; and

    (e) agreements equally proportionately unperformed, exceptwhere the agreement is an onerous contract.

    1.3.1 The standards specified in this Standard apply to the financial reportwhere information resulting from their application is material inaccordance with Accounting Standard AASB 1031 and AustralianAccounting Standard AAS 5 Materiality.

    1.3.2 This Standard addresses the recognition, measurement anddisclosure of provisions, which are defined as a subset of liabilities.The term provision has been used elsewhere to refer to items suchas depreciation and doubtful debts; these are adjustments to thecarrying amounts of assets and are not addressed in this Standard.

    1.3.3 For general insurers and life insurers, this Standard applies toprovisions, contingent liabilities and contingent assets that do notresult from insurance contracts and are not covered by anotherAccounting Standard or an Australian Accounting Standard. ThisStandard also applies to provisions, contingent liabilities andcontingent assets arising from uninsured events.

    1.3.4 This Standard applies to provisions for restructuring (includingrestructurings resulting from the acquisition of an entity oroperation, and from discontinuing operations), unless they fallwithin any of the exclusions in paragraph 1.3.

    1.3.5 With the exception of paragraphs 14.3 to 14.5, this Standard doesnot apply to provisions that are in the nature of employee benefits,irrespective of whether those employee benefits are required to berecognised in accordance with Accounting Standard AASB 1028Employee Benefits. Accordingly, this Standard does not apply toprovisions for employee benefits that are not required to berecognised under AASB 1028, including post-employment benefitsthat are superannuation or medical benefits and equity compensationbenefits.

  • AASB 1044 10

    1.3.6 Other Accounting Standards or Australian Accounting Standardsspecify whether sacrifices of economic benefits that have beenincurred are recognised as giving rise to increases in assets orrecognised as expenses. These issues are not addressed in thisStandard, and accordingly in general this Standard does not specifywhether the costs recognised when a provision is made are to berecognised as an asset in particular circumstances. However, thisStandard does address the circumstances in which provisions relateto an expected recovery from a third party, and whether suchrecoveries are reported as separate assets.

    1.3.7 Examples of provisions excluded from this Standards scope underparagraph 1.3(c) are provisions for the costs of removing oil rigs orrestoring mine sites or contaminated land.

    1.3.8 This Standard does not require the recognition of liabilities andrelated assets arising from agreements equally proportionatelyunperformed (for example, con