IPSAS 19 is based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets (1998).
IPSAS 19 prescribes the accounting treatment for Provisions, Contingent Liabilities and Contingent Assets and defines provisions, contingent liabilities and contingent assets and to identify when they should be recognized. Provisions should measured at the best estimate (taking into account risks and uncertainties) of the expenditure required to settle the present obligation. When payments are deferred and time value is material discounting to present value of the payments may be required.
IPSAS 19 was issued in October 2002 and applies to annual periods beginning on or after 1 January 2004.
History of IPSAS 19
Annual periods beginning on or after 1 January 2004.
Refer to IFAC website here
Summary of IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets
IPSAS 19 prescribes the accounting treatment for Provisions, Contingent Liabilities and Contingent Assets and has the objective define provisions, contingent liabilities and contingent assets and to identify when they should be recognized. The standard also covers the measurement and disclosure requirements for provisions, contingent assets and contingent liabilities.
This standard applies to entities that prepare and present financial statements under the accrual basis of accounting [IPSAS 19.1]. IPSAS 19 applies to all public sector entities other than GBEs [IPSAS 19.2].
Following items are excluded from the scope of the standard [IPSAS 19.1 and 4]:
(a) Contracts to provide social benefits for which no consideration is received that is approximately equal to the value of goods and services provided, directly in return from the recipients of those benefits
(b) items resulting from executory contracts unless they are onerous
(c) insurance contracts
(d) items covered by another IPSAS (e.g construction contracts IPSAS 11, note that possible onerous lease contracts are covered by this standard and not by IPSAS 13)
(e) items relating to income taxes or income tax equivalents
(f) items arising from employee benefits, except employee termination benefits that arise as a result of a restructuring
(g) financial instruments in the scope of IPSAS 29 Financial Instruments: Recognition and Measurement [IPSAS 19.4].
Key definitions [IPSAS 19.18]
Provision: A liability of uncertain timing or amount
Liability: present obligation as a result of past events
Contingent liability: a possible obligation depending on whether some uncertain future event occurs, or a present obligation but payment is not probable or the amount cannot be measured reliably
Contingent asset: a possible asset whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise
Onerous contract: contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits to be received under it
A provision shall be recognized only when [IPSAS 19.22]:
• an enterprise has a present obligation at the reporting date as the result of a past event
• an outflow of economic resources or service potential is probable
• the amount paid can be estimated reliably
A present obligation is an obligation toward a third party that derives from [IPSAS 19.25]:
• A contract or legislation (legal obligation)
• Past practice creating a valid expectation on the part of a third party (constructive obligation)
The existence of a present obligation means that the enterprise has no realistic alternative but to settle the obligation [IPSAS 19.25].
A possible obligation (a contingent liability) or a possible asset is disclosed [IPSAS 19.100 and 105] but not recognized [IPSAS 19.35 and 39].
A probable outflow of economic resources or service potential:
• takes the form in most cases of cash payments to a third party in order to settle the obligation
• has a negative economic value for the entity, that is the payment has no equivalent counterpart for the entity
o the third party renders no service to the entity in exchange of payment
o no provision can be recognised for costs that will be recognized as assets when incurred
• probable means «more likely than not»
The provision recognized should be the best estimate of the expenditure required to settle tohe obligation at the reporting date [IPSAS 19.44].
Best estimate [IPSAS 19.45]:
• amount that an enterprise would rationally pay to settle the obligation at the reporting date or to transfer it to a third party
• best estimate is usually based on costs incurred by entity (and not on transfer price to a third party, which could include a margin)
• take into account the risks and uncertainties to reach the best estimates
Discounted (if material) [IPSAS 19.53]
• discounted present value of payments using a pre-tax discount rate that reflects time value of money and risks specific to the liability
Consider future events [19.58]
• forecast reasonable changes in applying existing technology
• consider changes in legislation only if virtually certain to be enacted
• ignore possible gains on sale of assets [IPSAS 19.61]
An entity may expect reimbursement of some or all of the expenditure required to settle a provision [IPSAS 19.63].
• For example, through insurance contracts, indemnity clauses or suppliers’ warranties
The reimbursement is not deducted from the provision [IPSAS 19.63].
• Should be recognised as a separate asset
o only when it is virtually certain that reimbursement will be received if the entity settles the obligation
o the amount recognised for the reimbursement should not exceed the amount of the provision
In the statement of financial performance, the expense relating to a provision may be presented net of the amount recognised for a reimbursement [IPSAS 19.64].
Remeasurement and use of provisions
Review and adjust provisions at each reporting date, if the outflow of economic resources or service potential no longer probable, reverse the provision to revenue [IPSAS 19.69].
Provisions should only be used for the purpose for which they were originally recognized [IPSAS 19.71].
Future Operating Net Deficits
No provision should recognised for future economic losses [IPSAS 19.73].
But expected operating net deficits may be indication of impairment losses, which should be treated in accordance with IPSAS 21 and IPSAS 26 [IPSAS 19.75].
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits or service potential to be received under it [IPSAS 19.18].
A provision must be recognised for the expected loss on an onerous contract [IPSAS 19.73].
Expected loss is the lower of [IPSAS 19.79]:
• the net of contract revenue and expenses to be incurred for fulfilling the contract
• compensation or penalties to be incurred for not fulfilling the contract
Before a provision is recognised, an entity recognises any impairment loss on assets dedicated to the contract [IPSAS 19.80].
A restructuring is [IPSAS 19.81]:
• disposal or termination of an activity or business
• closure of branch office or termination of activities
• changes in management structure
• fundamental reorganisation of the entity
Restructuring provisions is recognised only when an entity has a detailed formal plan for the restructuring [IPSAS 19.83]:
• identifying at least the activity/operating unit concerned
• the locations affected
• the location, function and approximate number of employees concerned
• the expenditures undertaken
• when the plan will be implemented
• started to implement the restructuring plan or announced its main features to employees affected by it
It is only when these criteria are met that a constructive obligation exists.
Restructuring provisions should include only direct expenditures arising from the restructuring, that is to say [IPSAS 19.93]:
• necessarily entailed by the restructuring
• not associated with the ongoing activities of the entity
A restructuring provision does not include costs that relate to the future conduct of activity such as [IPSAS 19.94]:
• retraining or relocating continuing staff
• investments in new systems and distribution networks
Following disclosures are required for each class of provision [IPSAS 19.97]:
• the carrying amount at the beginning and end of the period
• additional provisions made in the period, including increases to existing provisions
• amounts used (that is, incurred and charged against the provision) during the period
• unused amounts reversed during the period
• effects of discounting and the effect of any change in the discount rate
A brief description for each class of provision of: [IPSAS 19.98]
• major assumptions
• expected reimbursement
The disclosures as described above [IPSAS 19.97 and 98] are applicable also provisions for social benefits for which it does not receive consideration approximately equal to the value of goods and services provided directly in return from the recipients of those benefits [IPSAS 19.99].
For each class of contingent liability, unless the outflow is remote [IPSAS 19.100]:
• estimate of the financial effect
• indication of the uncertainties
• possibility of any reimbursements
For contingent assets [IPSAS 19.105]:
• estimate of the financial effect
In case of non-disclosure because it is impracticable to disclose this information, this fact should be disclosed [IPSAS 19.108].
If the required disclosures above could potentially prejudice seriously the position of the entity, an entity need not to disclose this information, but shall only disclose general information together with the fact and the reason that the information is not disclosed [IPSAS 19.109].
IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets issued
1 January 2004
Effective date of IPSAS 19
1 January 2013
Effective date of Improvements to IPSASs 2011 (issued in October 2011)