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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.


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


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 different terminology, definition of technical terms and additional commentary provided by IPSAS 19.1 There are no differences of substance between IPSAS 19 and IAS 37, with the result that guidance with respect to IAS 37 is relevant to applying IPSAS 19. A complete list of differences between the two Standards is attached as Appendix A.

Scope Exclusions of IPSAS 19

6 IPSAS 19 applies to all provisions, contingent liabilities and contingent assets with the following important exceptions (paragraph 1): 1 Note that social benefits are excluded from the scope of IPSAS 19.


• Social benefits provided by an entity for which it does not receive approximately equivalent consideration from recipients – see ED 34 Social Benefits: Disclosure of Cash Transfers to Individuals or Households;

• Financial Instruments carried at fair value - covered in IAS 39 Financial Instruments: Recognition and Measurement (although IPSAS 19 does cover financial Instruments not carried at fair value e.g. guarantees);

• Executory contracts (i.e. contracts where both parties have either not performed or partially performed their obligations to an equal extent);

• Income taxes or income tax equivalents - covered in IAS 12 Income Taxes;

• Employee benefits (except employee termination benefits that arise as a result of a restructuring) – covered in IPSAS 25;

• Events covered by another IPSAS (e.g. leases2 and construction contracts).

Definitions of Liabilities and Provisions

7 While IPSAS 19 focuses upon provisions, it also represents important guidance for determining recognition of liabilities more generally. This section begins by explaining the nature of a liability, the impact that IPSAS 19 has had on liabilities in terms of its guidance around present obligations, and the difference between present obligation and the concept of “obligation” in UNSAS. This section then considers the nature of a provision.

Liabilities 8 Before considering the IPSAS 19 concept of a provision, it is important to set the context with the basic definition of a liability, as provisions form a subset of liabilities.

9 A liability is a present obligation3 as a result of past events, where settlement is expected to result in an outflow of resources (payment). The principle of the actual existence of a present obligation is important to note; financial statements deal with the financial position of United Nations System organizations at the end of a reporting period and not their possible position in the future. Therefore, no liability is recognized for costs that need to be incurred to continue the organizations’ ongoing activities in the future. Basic examples of liabilities include:

• Accounts payable

• Accrued employee benefits

• Unearned revenue

• Debt

10 A present obligation arises from an event that creates a legal or constructive obligation whereby an entity has no realistic alternative to settling that obligation (paragraph 18).

Example 1: Legal obligation

2 Although note that IPSAS 19 does address onerous operating leases – see paragraphs 13, 76-80. 3 The IASB Framework (see paras 60-63) defines an obligation as “a duty or responsibility to act or perform in a certain way.”


An organization owns a warehouse where it stores agricultural chemicals, which have contaminated the land beneath the warehouse. A legislative requirement exists to clean up land the organization occupies that has been contaminated by its activities. Therefore a legal obligation exists.

11 IPSAS 19 introduced an extension of the notion of obligation beyond legal obligations to include constructive obligations. Paragraph 18 provides two limbs to the definition of constructive obligation:

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.

12 Under this definition, a board decision or stated intention alone does not trigger an obligating event.4 The key aspect of a constructive obligation is that an entity’s action from the first limb must result in a valid expectation on the part of other parties that it will discharge the related responsibilities. These parties may be an entity that a reporting entity is interacting with, customers or the public at large (see example below).

Example 2: Constructive Obligation

An organization may have a widely published environmental policy (but no legislation) to undertake to clean up all contamination that it causes – and has a record of honoring its policy. Oil from a damaged naval ship occurs, and the organization agrees to pay for clean up costs. An obligating event has occurred, given the organization has created a valid expectation it will pay for the clean up through policy and past practice.5

13 When considering whether a valid expectation has been created, organizations should consider this expectation in terms of whether the result is that the organization has a realistic alternative to settling the obligation (discussed further below). Organizations should accordingly apply a high threshold before determining that a constructive obligation has occurred. For instance, if in Example 2 above the organization had not paid for clean up costs in some previous incidents, a valid expectation would not exist.

Comparison between IPSAS 19 and UNSAS

14 The IPSAS concept of present obligation for liability recognition differs to the concept of obligation used in UNSAS. UNSAS defines obligations as:

…amounts or orders placed, contracts awarded services received and other transactions which involve a charge against the resources of the current financial period and which will require payment during the same or a future period.6

15 The UNSAS concept includes unliquidated obligations, which can exist prior to the point at which goods or services are delivered, and can exist as early as the point at which a purchase order is produced. Under IPSAS, a decision to purchase or the creation of a purchase order does not result in a present obligation, either because an organization 4 See discussion in IPSAS 19 paragraphs 25 and 27. 5 Drawn from IPSAS 19, Appendix C, Example 2B. 6 UNSAS Revision VIII paragraph 39.


is still able to change its mind and withdraw from the purchase, or the other party is yet to meet its promises in relation to the transaction.

16 The IPSAS concept of a liability therefore will result in a “tightening” of the types of obligations that are recognized as liabilities in organizations’ financial statements relative to UNSAS. IPSAS also formally introduces the concept of a constructive obligation being capable of liability recognition.

Provisions

17 A provision is a subset of liabilities. IPSAS 19 on its initial introduction represented an important development in accounting for provisions. The detailed guidance within IPSAS 19 on provision recognition and measurement removed the level of discretion that reporting entities previously held in this area.

18 IPSAS 19 defines a provision as a liability of uncertain timing or amount (paragraph 18). The same definitional principles noted above (constructive obligation etc) in relation to liabilities therefore also apply to provisions. 7

Example 3: Provision

A third party submits a claim for damages relating to containers sent to a mission as part of a contract for supply of goods. The mission receives legal advice that in the event of legal proceedings, it is more likely than not to be liable. However it is unclear when settlement will be reached and what the final amount will be. The mission incurs a provision.

Meaning of “Provision” - Liability versus “Contra-Asset” 19 The term “provision” has in the past been a widely used term to encompass items such as provisions for doubtful debts, accumulated depreciation and impairment of assets. These “provisions” are “contra-asset” accounts. They are not liabilities. The use of the word “provision” in other standards is gradually being eliminated for such items. Under IPSAS the word “provision” generally should be used to talk about provisions as per the IPSAS 19 meaning.

20 The following sections describe the IPSAS 19 recognition, measurement and disclosure requirements for provisions.

Recognition of Provisions

21 IPSAS 19 sets out the key recognition criteria that must be met in order to recognize a provision. An organization must recognize a provision if, and only if (paragraph 22) 8:

• A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event);

• It is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; and

• A reliable estimate can be made of the amount of the obligation.

7 The points in the comparison between IPSAS and UNSAS section therefore also apply to provisions. 8 With key points in paragraphs 22 to 34 included.


22 These key recognition criteria are discussed below (for further detail see paragraphs 22 to 34 of the Standard).

Present Obligation 23 Further to the points made in the previous section, in most cases it will be clear whether a past event has given rise to a present obligation.

Example 4: Present Obligation

A horticultural association makes a claim for damaged nurseries that occurred as a result of a disposal of arms by a peacekeeping mission. The claim is accepted by a claims review board. However, the rightful owners of the properties are unknown at this stage and settlement of the claim is deferred until they are established.9

In this example, there is clearly a present obligation as a result of a past event, with the evidence being:

i. Damage has occurred (past event resulting in possible obligation);

ii. Claims review board has determined that the organization is liable (obligation is clear).

24 Occasionally, for example in some legal disputes, it may not be clear whether the obligating event has occurred - in these rare cases a provision is recognized if it is more likely than not that a present obligation exists (otherwise a contingent liability is disclosed) (paragraphs 23, 24). For example, if the claims review board in Example 4 had not yet made a finding, but the organization’s lawyers had advised that it was likely the board would find the organization liable, a provision would still be recognized.

Past Event 25 There must be some past event that has triggered the present obligation, for example an organization’s vehicle causing damage to third party property through a negligent act.

26 A provision cannot be recognized in anticipation of a future event (paragraph 26).

Example 5: Future event

An organization which has a considerable transport logistics component to its activities may be able to predict that in any given year around 30 transport incidents will occur at its fault whereby a legal liability will be incurred. No provision is recognized, until each incident occurs and fault is established.

27 There must be no realistic alternative to settling the obligation (paragraph 25). As noted above this requirement is a key factor in considering whether a constructive obligation is established. This requirement is also relevant where there may be lower cost alternatives to settling obligations.

Example 6: Realistic alternative to settling obligation

For example, under new legislation, an organization must fit air filters (costing $1 million) to its building before financial year end; otherwise it would be liable for a fine of $50,000. At year end, the organization does not recognize a provision to fit the air filters,

9 When recognizing a provision, it is not necessary to know the identity of the party to whom the obligation is owed (see IPSAS 19, paragraph 28).


because it has a cheaper alternative to incur a fine of $50,000 instead – and should recognize a provision for the fine instead.10

28 An obligation must exist independently of an organization’s future activities (paragraph 27). For example, a provision would not be recognized for a public commitment to deliver aid to a disaster zone where an organization has discretion over the mode, extent and timing of its delivery.

29 An obligation does not arise from proposed new legislation (for example that requiring environmental clean-up) until it is enacted. The exception is where there is evidence indicating that its enactment is virtually certain (for example, related agencies begin implementing policies in accordance with the legislation) (paragraph 30).

Probable Outflow 30 For the purposes of IPSAS 19, an outflow of resources or other event is considered probable if it is more likely than not (paragraph 31).

31 Where there are a number of similar obligations, the probability that an outflow will be required is determined by considering the class of obligations as a whole (paragraph 32).

Example 7: Class of obligations

An organization by a negligent act pollutes a river for a short period of time. Many landowners’ crops downstream rely upon the river for irrigation. While the chance of an individual landowner’s crops being damaged are small, it is anticipated that across all landowners significant crop damage is highly likely to have occurred for those that were drawing water over the pollution period. A provision is recognized on the basis of percentage estimates of landowners in the vicinity that were likely to be affected.

Reliable Estimate

32 IPSAS 19 recognizes that using estimates is common in the preparation of financial statements and expects that by using a range of possible outcomes, an organization will be able to make an estimate of the obligation that is sufficiently reliable for recognition purposes. In the “extremely rare” case where no reliable estimate can be made, the liability is disclosed as a contingent liability (paragraphs 33, 34).

Onerous Contracts and Restructuring Provisions 33 IPSAS 19 discusses various circumstances for when provisions should be recognized including two important scenarios, onerous contracts and restructuring (paragraphs 73-96).

34 Onerous contracts arise where the unavoidable costs of meeting the obligations under the contract exceed the economic benefits or service potential expected to be received under it (including amounts recoverable).

Example 8: Onerous contract

A mission is wound up before its commitments expire on a lease for a building it occupied. The organization should recognize up front the cost of all future payments related to the lease, less any subletting revenue they may obtain.

10 Drawn from IPSAS 19, Appendix C, Example 6.


35 A restructuring is a program planned and controlled by management that materially changes the scope of an organization’s activities or the way they are carried out. For example, a United Nations System organization may decide to shift its headquarters from New York to a location in Europe (see paragraph 81 for a wider range of examples).

36 A constructive obligation for restructuring costs should only be recognized when the organization has (paragraph 83):

• A detailed formal plan for the restructuring which identifies at least: the business or the part of the business concerned and principal locations affected, approximate number of employees that would need to be compensated for termination resulting from the restructuring (along with their function and location), expenditure that would be required to carry out the restructuring, and when the plan is to be implemented.

• 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.

37 An organization should only recognize a provision for the direct expenditures necessarily entailed by the restructuring – not those associated with any ongoing activities. For example, the costs of retraining continuing staff.

38 Restructuring provisioning is anticipated to be an area that will impact on United Nations System organizations occasionally. Appendix B contains further guidance on the types of expenditure that a restructuring provision should capture.

Measurement of Provisions

39 As noted earlier, the key characteristic of a provision is uncertainty, which can pose challenges in measurement. IPSAS 19 provides detailed guidance in this area, where this guidance also applies to estimating the financial impacts of contingent liabilities and contingent assets for disclosure purposes (paragraphs 100, 105).

Measure Provisions at their “Best Estimate”

40 The overarching IPSAS 19 measurement principle is that provisions should be measured at their “best estimate” (commonly referred to as “expected value”). “Best estimate” is the amount an organization would pay, currently, to either settle the actual obligation or provide consideration to a third party to assume it (paragraphs 44, 45).

41 Provisions for one-off events (environmental clean up of a site, settlement of a lawsuit) are measured at the most likely amount. Provisions for large populations of events (warranties, customer refunds) are measured at a probability weighted expected value. From time to time a range of probabilities is also used to estimate provisions for one off events if there is significant uncertainty (paragraphs 47, 48).

Example 9: Probability weighted expected value for one off event

An organization involved in a legal dispute receives advice from a legal firm around a range of potential scenarios (below) for resolving the dispute – resulting in the recognition of a provision for $3.5 million.


Scenario Potential payment outcome ($000)

Probability Probability weighted value ($000)

Out-of-court settlement 1,000 50% 500

Unfavorable court ruling 10,000 30% 3,000

Favorable court ruling No liability 20% 0

Recognize: 3,500

42 The best estimate should reflect any risks (i.e. variability of an outcome) and uncertainties surrounding underlying events. However, these factors should not be used to justify the creation of excessive provisions or deliberate overstatement of liabilities (paragraphs 50, 51).

43 Future events that may affect the amount required to settle the obligation should be taken into account. For example, a provision in relation to an onerous cont ract which is index linked to inflation (paragraphs 58, 59).

Use of Present Value 44 A provision should be present valued where the timing of related outflows has a material impact on the value of the liability (paragraph 53); the unwinding of the present value is treated as interest expense (paragraph 70).

Discount Rate and Other Valuation Variables

45 IPSAS 19 suggests the discount rate should be a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability. However in order to avoid duplication, IPSAS 19 then notes that if expected future cashflows have already been adjusted for risks and uncertainties, the discount rate should not reflect those risks (paragraph 56).

46 In practice organizations tend to use a discount rate for provisions that reflects an organization’s credit standing, whereby risks specific to the liability are reflected in cashflow estimates.11 This discount rate may therefore differ from that used for employee benefit reporting on a defined benefit basis (for example, After Service Health Insurance), where the starting presumption is to use government bond rates.12 See the implementation section below for further discussion about present valuing provisions.

47 In addition, organizations will generally rely upon standard indices for assumptions such as inflation rates and salary progression. 13

Treatment of Reimbursements and Changes to Provisions 48 Sometimes, an organization may be able to look to another party to pay part of all of a provisioned obligation, for example where the organization has insurance. Any reimbursement should only be recognized if it is virtually certain to be received, and 11 This is the approach recommended by US GAAP’s Concepts Statement 7 – see http://www.fasb.org/st/#cons 12 See IPSAS 25 paragraphs 91-95. 13 An example of the approach taken by the New South Wales Treasury is available at: http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0020/5834/nswtc06-16.pdf


should be treated as a separate asset (i.e. not netted off) (paragraph 63). On the other hand, gains on expected disposal of assets should not be taken into account in measuring a provision (paragraph 61).

49 At the end of each reporting date, organizations will need to review the circumstances and assumptions underlying provisions to ensure they reflect the current best estimate. For example, a change in discount rates for a present valued long-term liability may have a significant impact on the size of the liability. The provision should be reversed if it is no longer probable that there will be an outflow of resources (paragraph 69). Also, a provision should only be used for expenditure for which it was originally intended (paragraph 71).

Disclosures for Provisions

50 Given their volatile nature and the assumptions required in measurement, IPSAS 19 requires various disclosures to be made around provisions in order to fully inform users of the financial statements.

51 For each class of provision, organizations must disclose:

• A breakdown of the movements between the opening and closing balance - note that comparative information is not required (paragraph 97);

• A narrative covering (paragraph 98):

o A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;

o An indication of the uncertainties regarding the amount or timing of those outflows (including, where necessary in order to provide adequate information, disclosure of major assumptions made concerning future events); and

o The amount of any expected reimbursement.

Contingent Liabilities

52 IPSAS 19 deals with contingent liabilities, which do not meet the recognition threshold for liabilities. A contingent liability is either (paragraph 18):

• A possible obligation arising from past events, the outcome of which will be confirmed only on the occurrence or non occurrence of one or more uncertain future events not wholly within the organization's control; or

• A present obligation arising from past events, which is not recognized either because it is not probable that an outflow of resources will be required to settle an obligation, or the amount of the obligation cannot be reliably measured.

53 While the uncertainty aspects of contingent liabilities are such that recognition is not warranted, contingent liabilities still represent a risk to the organization and therefore potentially have an economic cost that users of the accounts need to be made aware of.

Example 10: Contingent Liability

A mission is based in a country where the government has agreed to make facilities it owns available to the mission free of charge. Midway through the financial year, the mission receives information that the hotel complex it is renting appears to be owned by the government. The mission ceases rent payments immediately until the hotel complex


establishes that it can rightfully charge rent. At year end, legal advice indicates that it is probable the mission does can recover rent payments made for the first half of the year and will not have to pay the unpaid amounts for the second half of the year.

The mission discloses a contingent liability for the unpaid rent for the second half of the year, as it still has a possible obligation that it may have to pay the rent.

Contingent Liabilities must be Disclosed

54 Therefore under IPSAS 19, while organizations are not to give formal recognition to contingent liabilities, they are required to disclose information about them (paragraphs 35, 36). For each class of contingent liability, organizations must disclose (paragraph 100):

• An estimate of its financial effect

• An indication of the uncertainties relating to the amount or timing of any outflow

• The possibility of any reimbursement

55 Disclosure of this information may be foregone if the possibility of any outflow in settlement is remote (paragraph 100).

56 Contingent liabilities may develop in a way not originally anticipated, and therefore should be continually assessed to determine if they have been extinguished, developed into provisions or liabilities, or if the disclosure information requires updating (paragraph 38).

Contingent Assets

57 IPSAS 19 also provides guidance around contingent assets. The significant change introduced by IPSAS 19 is the requirement to disclose contingent assets in certain circumstances.

Disclosure of Contingent Assets – only when Inflow is Probable

58 A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity (paragraph 39).

59 Contingent assets are not recognized, but must be disclosed where an inflow of economic benefits is probable (paragraphs 42 and 105).

Example 11: Contingent Asset

Refer to example 10 above where a mission has received legal advice that rent it has paid in the first half of the financial year for a hotel complex is more likely than not to be recoverable. In this circumstance, the mission discloses a contingent asset for the rent it paid for the first half of the year.

If the legal advice had indicated that the rent was less likely than not to be recoverable, the mission would not disclose a contingent asset.

60 The IPSAS 19 disclosure requirements are a brief description of the nature of the contingent asset, and where practicable, an estimate of financial effect (paragraph 105).


61 Similar to contingent liabilities, contingent assets should be assessed continually to ensure that developments are appropriately reflected in the financial statements (Paragraph 43).

62 If an inflow of economic benefits becomes virtually certain and can be measured reliably, an asset and the related revenue are recognized (paragraphs 43).

General Points on Disclosures

63 The Standard makes the following general disclosure points:

• Grouping of provisions is allowed if they are similar enough for the requisite disclosures about them to be encapsulated in a single statement. The same allowance exists for contingent liabilities (paragraph 101).

• If it is not practicable to make the disclosures required of contingent liabilities and contingent assets, that fact should be stated (paragraph 108).

64 In extremely rare circumstances, if the required disclosures for provisions, contingent liabilities and contingent assets are expected to seriously prejudice the position of the entity in a dispute with third parties on that respective matter, the organization can choose to not disclose that information, but should disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed (paragraph 109).

65 Appendix C provides a basic example from the 2007 OECD Financial Statements of provisions, contingent liability and contingent asset disclosures. The Final Accounts of the European Communities for the year ended 2006 provides a more comprehensive example of the necessary provisions, contingent liability and contingent asset disclosures. The relevant excerpts are included in Appendix E.

Transitional Provisions

66 Any provisions that exist at the date that organizations first adopt IPSAS 19 are recorded as an opening balance adjustment to the earliest period first reported (paragraph 110). There are no other transitional provisions and no transition period.

Implementation

Present Valuing Provisions

67 Appendix D1 contains an example of the associated journal entries when present valuing a provision to reflect the time value of money.

68 The provision is adjusted on the basis of any changes in expected future cash outflows or discount rates. Any expenses recognized prior to the point of re-estimation are left unchanged. For example, a change in discount rate will have an impact on the amount of interest expense for future periods – but does not impact interest expense (or other expenses recognized) prior to the point of re-estimation. 14 Appendix D2 contains an example using journal entries.

14 This point is consistent with IPSAS 3 paragraphs 41 to 43. It is highlighted in IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities. See in particular, Illustrative example 1, paragraphs IE2 to IE5.


More Generally 69 IFAC Study 1415 Chapter 7 contains implementation guidance on accounting for liabilities including provisions, where accounting for environmental liabilities is considered in depth.

70 Organizations will also need to consider the wording of their budget related material such as Financial Regula tions and Rules in order to differentiate the concepts being used in a budget context when compared to a financial reporting context. For example, words such as “obligation” in a budget context may need to be replaced with other words such as “encumbrance” or “commitment.”

15 Available at: http://www.ifac.org/Store/Details.tmpl?SID=102026702640546&Cart=1211281811777736


APPENDIX A: Differences between IAS 37 and IPSAS 19

(From IPSAS 19 Appendix 1)

International Public Sector Accounting Standard (IPSAS) 19, “Provisions, Contingent Liabilities and Contingent Assets” is drawn primarily from International Accounting Standard (IAS) 37, “Provisions, Contingent Liabilities and Contingent Assets” (1998). The main differences between IPSAS 19 and IAS 37 are as follows:

• IPSAS 19 includes commentary additional to that in IAS 37 to clarify the applicability of the standards to accounting by public sector entities. In particular, the scope of IPSAS 19 clarifies that it does not apply to provisions and contingent liabilities arising from social benefits provided by an entity for which it does not receive consideration that is approximately equal to the value of the goods and services provided directly in return from recipients of those benefits. However, if the entity elects to recognize provisions for social benefits, IPSAS 19 requires certain disclosures in this respect.

• Black letter in IAS 37 has been modified and commentary additional to that in IAS 37 has been included in IPSAS 19 to clarify that, in the case of onerous contracts, it is the present obligation net of recoveries that is recognized as a provision.

• The scope paragraph in IPSAS 19 makes it clear that while provisions, contingent liabilities and contingent assets arising from employee benefits are excluded from the scope of the Standard, the Standard, however, applies to provisions, contingent liabilities and contingent assets arising from termination benefits that result from a restructuring dealt with in the Standard.

• IPSAS 19 uses different terminology, in certain instances, from IAS 37. The most significant examples are the use of the terms entity, revenue, “statement of financial performance, and statement of financial position in IPSAS 19. The equivalent terms in IAS 37 are enterprise, income, income statement, and balance sheet.

• IPSAS 19 contains the definitions of technical terms used in IAS 37 and an additional definition for “executory contracts.”

• The Appendix C examples have been amended to be more reflective of the public sector.

• IPSAS 19 contains an additional appendix (Appendix E) which illustrates the journal entries for recognition of the change in the value of a provision over time, due to the impact of the discount factor.


APPENDIX B: Costs that should be Included and Excluded from a Restructuring Provision

B1 The table below analyses typical restructuring costs that should be included and excluded from a restructuring provision.16

Description of costs Included Excluded Reason for exclusion

Voluntary redundancies v

Compulsory redundancies v

Lease cancellation fees for building which will no longer be used

v

Cost of remaining non-cancellable term of an operating lease after operations cease.

v

Rental costs under the lease contract for the period after the criteria in IPSAS 19.83 were met, but before operation ceased.

v Operations continued to be used.

Impairment write-down of certain property plant and equipment

v The impairment provision should be assessed in accordance with IAS 36 and offset against the asset

Relocation of employees and equipment from one office to another

v Costs associated with ongoing activities

Retraining of remaining employees v “

Recruitment costs for new staff v “

Marketing and communication costs associated with restructuring

v “

Investments in a new distribution network v “

Costs to be incurred in respect of claims for injuries and illnesses occurring while the restructuring is being implemented.

v “

Consulting fees to identify future corporate strategies and organizational structures.

v “

16 This table was adapted from an example developed by Price Waterhouse Coopers – see http://www.pwc.com/gx/eng/about/svcs/corporatereporting/05Solution74_24.pdf


APPENDIX C: 2007 OECD Financial Statements

C1 The following extracts are from the Financial Statements of the Organization for Economic Co-operation and Development as at December 2007.

C2 A Full copy of these financial statements is available at17:

http://www.oecd.org/dataoecd/11/37/40355273.doc

Note 14: Provisions for liabilities and charges

31 December 2007

31 December 2006

€'000 €'000

Provisions for risks 679 746 Provision for asbestos removal - 690

Total provisions for liabilities and charges 679 1,436

Provisions for risks represent the evaluation at the closing date of payments to be made in respect of various litigations to which the Organisation is party and the cost of publication sale returns from distributors.

The provision for asbestos removal has been fully utilised and the asbestos removal work was completed as scheduled during the 1st Quarter 2007.

Note 23: Contingencies and capital commitments

A. Contingencies

The Organisation is or may be a party to a limited number of legal proceedings or technical disputes. Management believes that the liabilities that might result from these litigations will not be material in relation to the Organisation’s operations or financial position.

In 2002, the Organisation signed a lease for office space in La Défense covering the period 2002-2011. In the event that the lease would be cancelled before its current end date, the Organisation would be liable to pay penalties depending on the notice of cancellation given. In accordance with the present schedule of the Site Project, which provides for the vacation of the leased premises in 2009, the sum of 8 625 K€ has been included in the 2001-2009 Site Budget that was voted by Council in 2003.

In 2002, the Organisation set up an early retirement scheme for a closed group of employees that had been exposed to an asbestos risk. The scheme allows the employees to request early retirement providing they are over 50 and under 60 years of age, and certain conditions as to job function and medical condition are met. At 31 December 2007 one employee was receiving early retirement payments under the scheme. In the unlikely event that all the remaining eligible employees benefited fully from the scheme the maximum amount payable would be approximately 4.3 M€ over the period to June 2031.

17 Also available on the CEB website at: https://fb.unsystemceb.org/reference/05/ipsasfinstate/


APPENDIX D: Example of Provisioning using Present Values

D1 Assume in the legal dispute in Example 9 of the main body that at year end in year zero, the outcome to the dispute is expected to be finalized in two years time. At the end of year two, the court ruling is near due, and a ruling from a similar case indicates that the organization is likely to be liable for $10 million. Using a discount rate of 5.5%, the journal entries would be:

Journal Entries for year ended: Dr $000 Cr $000 Year 0 Dr Expense Cr Legal claims provision ( Present value calcn is: $3,500 / (1.055)^2 = 2981)

3,145

3,145

Year 1 Dr Interest expense Cr Legal claims provision (Interest expense calcn is: $3145*0.055 = $173)

173

173

Year 2 Dr Interest expense Cr Legal claims provision (Interest expense calcn is: $3318*0.055 = $182) Dr Expense Cr Legal claims provision (To increase provision from $3,500 to $10,000)

182

6,500

182

6,500

Example of Adjustment to Provision

D2 At the end of year 1, the discount rate is reassessed from 5.5% to be 10%. The present value of the liability therefore decreases from $3,318 to $3,182. The impact on journals above for this change in scenarios is summarized below.

Journal Entries for year ended: Dr $000 Cr $000 Year 1 Dr Interest expense [Entry does not change] Cr Legal claims provision (Interest expense calcn is: $3145*0.055 = $173) Dr Legal claims provision Cr Expense (To reflect decrease in liability from $3,318 to $3,182 as a result of discount rate change from 5.5% to 10%)

173

136

173

136

Year 2 Dr Interest expense Cr Legal claims provision (Interest expense calcn is: $3182*0.1 = $318) Dr Expense [journal unchanged] Cr Legal claims provision (To increase provision from $3,500 to $10,000)

318

6,500

318

6,500


APPENDIX E: 2006 EC Financial Statements

E1 The following pages are extracts from the European Communities Financial Statements for the year ended 2006 covering:

• Provisions (long term and short term)

• Contingent Assets and Contingent liabilities

E2 A full copy of these financial statements is available at:

http://ec.europa.eu/budget/library/publications/fin_manag_account/fin_annual_acc_2006_en.pdf

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