Provisions, Contingent Liabilities and Contingent MASB 20 Introduction 1. MASB 20 prescribes the...
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LEMBAGA PIAWAIAN PERAKAUNAN MALAYSIAMALAYSIAN ACCOUNTING STANDARDS BOARD
MASB Standard 20
Provisions, Contingent Liabilitiesand Contingent Assets
Any correspondence regarding this Standard should be addressed to:
The ChairmanMalaysian Accounting Standards BoardSuites 5.01 - 5.03, 5th Floor, Wisma MaranNo. 338, Jalan Tuanku Abdul Rahman50100 Kuala Lumpur
Tel : 03-4669199Fax. : 03-4669212
E-mail address : firstname.lastname@example.orgWebsite address : http://www.masb.org.my/
Malaysian Accounting Standards Board 2001
1. MASB 20 prescribes the accounting and disclosure for all provisions,contingent liabilities and contingent assets, except:
(a) those resulting from financial instruments that are carried at fairvalue;
(b) those resulting from executory contracts, except where the contractis onerous. Executory contracts are contracts under which neitherparty has performed any of its obligations or both parties havepartially performed their obligations to an equal extent;
(c) those arising in insurance enterprises from contracts withpolicyholders; or
(d) those covered by another MASB Standard.
2. The Standard defines provisions as liabilities of uncertain timing oramount. A provision should be recognised when, and only when:
(a) an enterprise has a present obligation (legal or constructive) as aresult of a past event;
(b) it is probable (i.e. more likely than not) that an outflow of resourcesembodying economic benefits will be required to settle theobligation; and
(c) a reliable estimate can be made of the amount of the obligation. TheStandard notes that it is only in extremely rare cases that a reliableestimate will not be possible.
3. The Standard defines a constructive obligation as an obligation thatderives from an enterprises actions where:
(a) by an established pattern of past practice, published policies or asufficiently specific current statement, the enterprise has indicatedto other parties that it will accept certain responsibilities; and
(b) as a result, the enterprise has created a valid expectation on the partof those other parties that it will discharge those responsibilities.
4. In rare cases, for example in a law suit, it may not be clear whether anenterprise has a present obligation. In these cases, a past event is deemedto 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 thebalance sheet date. An enterprise recognises a provision for that presentobligation if the other recognition criteria described above are met. If itis more likely than not that no present obligation exists, the enterprisediscloses a contingent liability, unless the possibility of an outflow ofresources embodying economic benefits is remote.
5. The amount recognised as a provision should be the best estimate of theexpenditure required to settle the present obligation at the balance sheetdate, in other words, the amount that an enterprise would rationally payto settle the obligation at the balance sheet date or to transfer it to a thirdparty at that time.
6. The Standard requires that an enterprise should, in measuring aprovision:
(a) take risks and uncertainties into account. However, uncertainty doesnot justify the creation of excessive provisions or a deliberateoverstatement of liabilities;
(b) discount the provision, where the effect of the time value of moneyis material, using a pre-tax discount rate (or rates) that reflect(s)current market assessments of the time value of money and thoserisks specific to the liability that have not been reflected in the bestestimate of the expenditure. Where discounting is used, the increasein the provision due to the passage of time is recognised asborrowing costs;
(c) take future events, such as changes in the law and technologicalchanges, into account where there is sufficient objective evidencethat they will occur; and
(d) not take gains from the expected disposal of assets into account,even if the expected disposal is closely linked to the event givingrise to the provision.
7. An enterprise may expect reimbursement of some or all of theexpenditure required to settle a provision (for example, throughinsurance contracts, indemnity clauses or suppliers warranties). Anenterprise should:
(a) recognise a reimbursement when, and only when, it is virtuallycertain that reimbursement will be received if the enterprise settlesthe obligation. The amount recognised for the reimbursement shouldnot exceed the amount of the provision; and
(b) recognise the reimbursement as a separate asset. In the incomestatement, the expense relating to a provision may be presented netof the amount recognised for a reimbursement.
8. Provisions should be reviewed at each balance sheet date and adjusted toreflect the current best estimate. If it is no longer probable that an outflowof resources embodying economic benefits will be required to settle theobligation, the provision should be reversed.
9. A provision should be used only for expenditure for which the provisionwas originally recognised.
Provisions - Specific Applications
10. The Standard explains how the general recognition and measurementrequirements for provisions should be applied in three specific cases:future operating losses; onerous contracts; and restructurings.
11. Provisions should not be recognised for future operating losses. Anexpectation of future operating losses is an indication that certain assetsof the operation may be impaired. In this case, an enterprise tests theseassets for impairment under MASB ED 25, Impairment of Assets.
12. If an enterprise has a contract that is onerous, the present obligationunder the contract should be recognised and measured as a provision. Anonerous contract is one in which the unavoidable costs of meeting theobligations under the contract exceed the economic benefits expected tobe received under it.
13. The Standard defines a restructuring as a programme that is planned andcontrolled by management, and materially changes either:
(a) the scope of a business undertaken by an enterprise; or
(b) the manner in which that business is conducted.
14. A provision for restructuring costs is recognised only when the generalrecognition criteria for provisions are met. In this context, a constructiveobligation to restructure arises only when an enterprise:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employeeswho will be compensated for terminating their services;
(iv) the expenditure 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 outthe restructuring by starting to implement that plan or announcingits main features to those affected by it.
15. A management or board decision to restructure does not give rise to aconstructive obligation at the balance sheet date unless the enterprisehas, before the balance sheet date:
(a) started to implement the restructuring plan; or
(b) communicated the restructuring plan to those affected by it in asufficiently specific manner to raise a valid expectation in them thatthe enterprise will carry out the restructuring.
16. Where a restructuring involves the sale of an operation, no obligationarises for the sale until the enterprise is committed to the sale, i.e. there isa binding sale agreement.
17. A restructuring provision should include only the direct expenditurearising 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 enterprise. Thus, arestructuring provision does not include such costs as: retraining orrelocating continuing staff; marketing; or investment in newsystems and distribution networks.
18. The Standard supersedes the parts of MASB Approved AccountingStandard IAS 10, Contingencies and Events Occurring After the BalanceSheet Date, that deal with contingencies. The Standard defines acontingent liability as:
(a) a possible obligation that arises from past events and whoseexistence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly withinthe control of the enterprise; or
(b) a present obligation that arises from past events but is notrecognised because:
(i) it is not probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured withsufficient reliability.
19. An enterprise should not recognise a contingent liability. An enterpriseshould disclose a contingent liability, unless the possibility of an outflowof resources embodying economic benefits is remote.
20. The Standard defines a contingent asset as a possible asset that arisesfrom past events and whose existence will be confirmed only by theoccurrence or non-occurrence of one or more uncertain future events notwholly within the control of the enterprise. An example is a claim that anenterprise is pursuing through legal processes, where the outcome isuncertain.
21. An enterprise should not recognise a contingent asset. A contingent assetshould be disclosed where an inflow o