Section 19: Provisions and Contingencies (AASB1061_04-26)

This section applies to provisions, contingent liabilities and contingent assets, except for those addressed by paragraph 1.5 or another section of this Standard, for example: 

(a) financial instruments (including financial guarantee contracts) (see Section 10); 

(b) leases (see Section 18); 

(c) employee benefit obligations (see Section 23); and 

(d) income taxes (see Section 24).

The word ‘provisions’ is sometimes used in the context of such items as depreciation and impairment of assets (eg uncollectible receivables). Those are adjustments of the carrying amounts of assets, instead of the recording of liabilities, and therefore are not covered by this section.

A provision is a liability of uncertain timing or amount. For example, an entity’s lease of office premises may contain conditions that require the premises to be renovated at the end of the lease, so a provision for this is recorded.

A provision shall be recorded as a liability when: 

(a) the entity has a present obligation (legal or constructive) as a result of a past event; 

(b) it is probable that the entity will need to transfer assets to another party in settling the obligation; and 

(c) the entity can make a reliable estimate of the amount of the obligation.

Only obligations arising from past events and that the entity has no realistic alternative to avoid settling are present obligations. Present obligations exist independently of the entity’s future actions (ie they must be settled in one manner or another, regardless of choices the entity makes about how it operates in the future).

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. 

An example of a constructive obligation is a non-legally binding obligation to remediate an operating site to its original condition. For example, an entity would have a constructive obligation to restore a disturbed operating site if the entity has made a public announcement that, consistent with its past practice, it will remediate that site, and other parties expect the entity to act in a manner consistent with its public announcement.

The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other liabilities. Except in extremely rare cases, an entity should be able to make a reliable estimate of the amount of the obligation and therefore record a provision. Where a reliable estimate of the amount of a provision cannot be made, the liability is not recorded and instead is disclosed as a contingent liability (see paragraphs 19.13–19.15).

The only liabilities recorded in an entity’s statement of financial position are obligations existing at the end of the reporting period as a result of a past event. Therefore, a provision shall not be recorded for liabilities that might result from a future event, because these liabilities do not yet exist. For example, costs likely to be incurred in the future to continue an entity’s activities in the future are not liabilities. Similarly, provisions shall not be recorded for expected future operating losses.

Firm commitments are binding agreements for the exchange of a specified quantity of assets at a specified price on a specified future date or dates. They are not recorded as liabilities because the counterparty has yet to perform its promises under the binding agreement or satisfy other eligibility criteria, which is necessary for a present obligation of the entity to arise. Information about an entity’s firm commitments to purchase goods, services or other assets is useful for users. An entity shall disclose the information about commitments specified in other sections of this Standard. 

Provisions shall be measured at the entity’s best estimate of the undiscounted amount to be paid, taking into account current information about conditions existing at the end of the reporting period. For example, where an entity expects to settle an obligation to clean up a site where it held a fundraising event by engaging a contractor to perform this work, the entity would take into account current contractor rates and the estimated effort to complete the work based on the site conditions at the reporting date in estimating the amount required to settle the obligation.

When some or all of the amount required to settle a provision might be reimbursed by another party (for example, through an insurance claim), the entity shall record any right to reimbursement as an asset, separately from the provision, only when it is virtually certain that the entity will receive the reimbursement if it settles the provision. The amount recorded for the reimbursement shall not exceed the amount recorded for the provision. In the statement(s) of profit or loss and other comprehensive income, the entity may offset any reimbursement income against the expense relating to the provision.

For each class of provision, an entity shall disclose: 

(a) a brief description of the nature of the obligations; 

(b) the expected amount at which the provision is recorded, separated into current and non-current portions; 

(c) an indication of the uncertainties about the amount of the future payments required to settle the obligations; 

(d) if significant uncertainty exists about the classification of the provision into its current and non-current portions, the existence of that uncertainty and reason(s) why; and 

(e) the amount of any expected reimbursement, stating the amount of any asset recorded for that expected reimbursement. 

Comparative information for prior periods is not required.

A contingent liability is: 

(a) a possible obligation that arises from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of an uncertain future event not wholly within the entity’s control; or 

(b) a present obligation that arises from past events but is not recorded because: 

(i) it is not probable that a transfer of assets will be required to settle the obligation; or 

(ii) the amount of the obligation cannot be measured reliably.

Examples of a contingent liability are, in relation to court cases in progress, a possible obligation where the entity disputes an unproven claim against it, or a present obligation where the entity does not dispute a claim against it but the amount of the compensation to be determined by the court cannot be measured reliably. Contingent liabilities shall not be recorded in the statement of financial position, but information about them shall be disclosed in the notes (see paragraph 19.15).

Unless the possibility of any outflow of resources in settlement is remote, an entity shall disclose, for each class of contingent liability, a brief description of the nature of the contingent liability and, when practicable: 

(a) an estimate of the amount of the contingent liability; 

(b) an indication of the uncertainties about the amount or timing of any outflow of assets; and 

(c) the possibility of any reimbursement. 

If it is impracticable to make one or more of the disclosures in paragraphs (a)–(c), that fact shall be stated.

A contingent asset is a possible asset (eg a claim that is being disputed by the other party) that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control. Contingent assets shall not be recorded in the statement of financial position, but information about them shall be disclosed in the notes (see paragraph 19.17). However, when it is virtually certain that economic benefits will flow to the entity (eg when an amount becomes receivable as a result of a favourable judgement), then the related asset is not a contingent asset and should be recorded as an asset in the statement of financial position. 

If an inflow of economic benefits from a contingent asset is probable at the end of the reporting period, an entity shall disclose in the notes a brief description of the nature of the contingent asset and, when practicable, an estimate of the amount of the contingent asset. If it is impracticable to disclose an estimate of the amount of the contingent asset, that fact shall be stated.

In extremely rare cases, disclosure of some or all of the information required by paragraphs 19.12, 19.15 or 19.17 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.