NATIONAL BOARD OF ACCOUNTANTS AND

AUDITORS

DIPLOMA IN IPSASs

IPSAS 19:PROVISIONS
19:PROVISIONS,, CONTINGET
LIABILITIES AND CONTINGENT ASSETS
 Objectives of IPSAS 19
n To define provisions, contingent
assets and Contingent liabilities
n Identify circumstances in which
which;;
Provision should be recognised
How they should be measured
Disclosure required for them
n Disclosure required for contingent
assets and contingent liabilities
 Scope of IPSAS 19
n All entities which prepare and
present financial statements under
accrual basis of accounting are under
obligation to apply the provisions of
IPSAS 19 for provisions, Contingent
liabilities and Contingent Assets
Out of Scope of IPSAS 19

a) 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 goods or services
provided, directly in return from the
recipients of those benefits
b) Those resulting from executory contracts
other than where the contract is
Onerous
 Out of Scope of IPSAS 19 (1/2)

n Then what is an executory contract?

n Executory contracts are the contracts
under which neither party has performed
any of its obligations or both parties
have performed their obligations to an
equal extent
 Out of Scope of IPSAS 19 (2/2
(2/2))
c) Insurance contracts
d) Those covered by other IPSASs (IPSAS 11 11::
Const.. Contract& Finance Leases IPSAS 11
Const 11))
e) Those arising in relation to income taxes or
income tax equivalents (IAS 12
12))
f) Those arising from employee benefits, except
termination benefits that arise as a result of a
restructuring (IPSAS 25
25))
g) Financial instruments under IPSASs 29 29::
Financial Instruments Recognition and
Measurements
Provisions, Payables and Accruals (1/2)
(1/2)
n Provisions are different from other
liabilities such as payables and accruals
because there is uncertainty about the
timing or amount of the future
expenditure required in settlement
settlement..
n By definition a Provision is a liability of
uncertain amount or timing
n Are provision for depreciation,
impairment of assets and doubtful
debts applicable to this standard?
Provisions, Payables and Accruals (2/2)
n Payables are liabilities to pay for goods
or services that have been received or
supplied and have been invoiced or
formally agreed with the supplier
supplier..
n Accruals are liabilities to pay for
goods or services that have been
received or supplied but have not
been paid, invoiced or formally
agreed with the supplier
supplier..
 Recognition of Provisions (1/2)
n A provision should be recognized
when::
when
An entity has a present obligation (legal
or constructive) as a result of a past
event..
event
It is probable that an outflow of
resources embodying economic benefits
or service potential will be required to
settle the obligation
obligation..
A reliable estimate can be made of the
amount of the obligation
obligation..
 Recognition of Provisions (2/2
(2/2))
n If the conditions are not met, no
provision should be recognized
recognized..
n Also when provisions are no
longer probable, they should be
derecognized
 Past events (1/2)
n A past event that leads to a
present obligation is called an
obligating event
event..
n For an event to be an obligating
event, it is necessary that the
entity has no realistic alternative
to settling the obligation created
by the event
event..
 Past events (2/2)
(2/2)
n The entity has no realistic
alternative to settling the
obligation created an obligenting
event if
if::
Where the settlement of the obligation
can be enforced by law
law..
In the case of a constructive obligation,
where the event (which may be an
action of the entity) creates valid
expectations in other parties that the
entity will discharge the obligation
obligation..
 Legal Obligation
n A legal obligation is an obligation
that derive from
a) A contract (through explicit or implict
terms)
b) Legislation
c) Other operation of laws
 Constructive obligations
n A constructive obligation is an obligation
that derives from an entitys actions
where::
where
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..
responsibilities
As a result, the entity has created a valid
expectation on the part of those other parties
that it will discharge those responsibilities
 Probable outflow of resources
n An outflow of resources embodying
economic benefits or service potentials
regarded as probable if
the event is more likely than not to occur
occur,,
i.e. the probability that the event will occur is
greater than the probability that it will not
not..
The cut off point is 50
50%%
 Reliable estimate
n Practical but essential accounting
problem..
problem
n The use of estimates is an essential part
of the preparation of financial statements
and does not undermine their reliability
reliability..
n Except in extremely rare cases, an entity
will be able to determine a range of
possible outcomes and can therefore
make an estimate of the obligation that is
sufficiently reliable to use in recognizing a
provision..
provision
 Measurement
n The amount recognized as a
provision should be the best
estimate of the expenditure required
to settle the present obligation at the
reporting date
date..
n Provisions should be discounted
where the effect of the time value of
money is material
material..
n Discounting effects should be
unwound
 Risk and uncertainties
n Risk: event uncertainty - trigger
Risk:
events giving rise to outflows arising
arising..
n Risk:: impact uncertainty - variable
Risk
amounts
 Illustration (1/3)
n A government medical laboratory provides
diagnostic ultrasound scanners
scanners.. The equipment
is provided with a warranty under which the
medical centres and hospitals are covered for
the cost of repairs of any defects that become
apparent within the first six months after
purchase..
purchase
n If minor defects were detected in all equipment
provided,, repair costs of 1 million would
provided
result.. If major defects were detected in all
result
equipment provided
provided,, repair costs of 4 million
would result
result..
 Illustration (2/3
(2/3))
n The laboratorys past experience and future
expectations indicate that, for the coming year,
75%
75% of the equipment will have no defects,
20%
20% of the equipment will have minor defects
and 5% of the equipment will have major
defects..
defects
n What will be the amount of provision to be
recognised in the financial statements?
 Illustration (3/3
(3/3))
n The laboratory assesses the probability of an
outflow for the warranty obligations as a whole
whole..
The expected value of the cost of repairs is
therefore::
therefore
n - (75
75%% of nil) + (20
20%
% of 1m) + (5% of 4m)
=
n 400
400,,000
 Disclosures (1/2)
n The carrying amount at the beginning and end
of the period
period::
Additional provisions made in the period, including
increases to existing provisions
provisions..
Amounts used (that is, incurred and charged
against the provision) during the period
period..
Unused amounts reversed during the period
period..
The increase in provision during the period in the
discounted amount arising from the passage
of time and the effect of any change in the
discount rate
rate..
 Disclosures (2/2
(2/2))
n The carrying amount at the beginning and end
of the period
period::
A brief description of the nature of the obligation
and the expected timing of any resulting
outflows of economic benefits or service
potential..
potential
An indication of the uncertainties about the amount
or timing of those outflows
outflows.. Where necessary
to provide adequate information, an entity
should disclose the major assumptions made
concerning future events
events..
 Changes in provisions
n Provisions should be reviewed at
each reporting date and adjusted to
reflect the current best estimate
estimate..
n Adjustments in provisions are
included in the current periods net
surplus or deficit.
Contingent liabilities and Assets (1/2)
n A Contingent Liability is either
either::
n A possible obligation arising from past events
whose existence will be confirmed only by the
occurrence of one or more uncertain future
events not wholly within the control of the
entity..
entity OR

n A present obligation that arises from past

events but is not recognized because
because::
It is not probable that an outflow of economic benefit
will be required to settle the obligation
obligation..
The amount of the obligation cannot be measured
with sufficient reliability
reliability..
Contingent liabilities and Assets (2/2
(2/2))
n What is the relationship between
provision and contingent
liability?
n A Contingent ASSET is A possible
ASSET arising from past events
whose existence will be confirmed
only by the occurrence of one or
more uncertain future events not
wholly within the control of the
entity..
entity
 Accounting treatment (1/2)
n An entity should not recognize a
contingent liability
liability..
n A contingent liability is disclosed
unless the possibility of an outflow of
resources embodying economic
benefits or service potential is
remote..
remote
 Accounting treatment (2/2)
(2/2)
n Contingent assets are not recognized in
financial statements since this may result
in the recognition of revenue that may
never be realized
realized..
n When the realization of revenue is
virtually certain, then the related asset is
not a contingent asset and its recognition
is appropriate
appropriate..
n A contingent asset is disclosed where an
inflow of economic benefits or service
potential is probable
probable..
 Onerous contracts (1/3)
n An onerous contract is a contract
for the exchange of assets or
services in which the unavoidable
costs of meeting the obligations
under the contract exceed the
economic benefits or service
potential expected to be received
under it
it..
 Onerous contracts (2/3
(2/3))
n If an entity has a contract that is
onerous, the present obligation
(net of recoveries) under the
contract should be recognized
and measured as a provision
provision..
n The liability recognized is for the

unavoidable costs
costs..
 Onerous contracts (3/3
(3/3))
Unavoidable costs of
meeting an obligation
are the lower of:

Cost of Penalties from

fulfilling failure to
the contract fulfill the contract
 Restructuring
n Under IPSAS, restructuring
provisions are recognized if an
obligation exists, which may be
constructive or legal
legal..
n The obligation normally arises when
the entity has both of the following
following::
detailed formal plan for the restructuring
restructuring..
Raised an expectation for settlement with the
beneficiaries of the settlement by either
starting to implement the plan or announcing
the plans main features to those impacted
 Restructuring measurement
n A restructuring provision should

include only direct expenditures

arising from the restructuring
and which are as follows
follows::
Necessarily entailed by the
restructuring..
restructuring
Not associated with the ongoing
activities of the entity
entity..
 Contingent assets
n Contingent assets usually arise from
unplanned or other unexpected
events that are not wholly within the
control of the entity and give rise to
the possibility of an inflow of
economic benefits or service
potential to the entity
entity..
n An example is a claim that an entity
is pursuing through legal processes
where the outcome is uncertain
 Example 1
n A government department enters
a lease agreement that has the
following components
components::
a) Lease period
period:: 1Jan 2016
2016--31 December
2017
b) Monthly lease payments TZS
2,000
000,,000
c) Early termination penalty TZS 40
40m
m
n What provision should be
recognised?
 Example 2

n A claim for damages against the

municipality is received amounting to
TZS 200
200mm.
n Legal advice suggests that the claim
has a 25
25%% of being successful but,
in any case, the municipality is
insured for 50
50%% of any claims
claims..
n What is the correct accounting
treatment?
 Example 3

n A housing department in a local

municipality appoints a contract to
refurbish houses for publically owned
property..
property
n Payment of TZS 20 20,,000
000,,000 is made
when the refurbishment is made on each
property.. What is the correct accounting
property
treatment?
treatment ?
a) Create a provision
b) Create a contingency
c) Do not create a provision or contingency
 End of Discussion
Thanks for listening
n
and participation