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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-21/” type=”big” color=”red”] Return to Section 21 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Section 21 – Example 1 – Accounting policy notes – Provisions
Example 26 – Extract from accounting policy notes
(a) Provisions
Provisions are recognised when the company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount of the obligation can be estimated reliably.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as a finance cost.
The extent a legal or constructive obligation exists, the acquisition costs include the present value of estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to/and or deducted from carrying value of the related asset. To the extent the change results in a negative carrying amount, the difference is recognised in the profit and loss. The change in depreciation is recognised prospectively.
Or where remediation provisions are required include the below:
Environmental liabilities
Liabilities for environmental costs are recognised when environmental assessments determine clean-ups are probable and the associated costs can be reasonably estimated. Generally the timing of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of active sites. The amount recognised at the balance sheet date is the latest best estimate of the expenditure required.
Discounted liabilities in respect of environmental liabilities and closures costs have been classified between amounts due within one year and due after one year. Provisions for long term obligations are discounted at a rate of X%.
OR where closure costs include the below
Closure costs
All costs associated with the decision to cease trading have been recognised in these financial statements. These include a write down of assets, provisions for expected closure costs together with profit and losses expected to be incurred up to date of cessation of trading.
Extract from notes to the financial statements
| 10 Environmental remediation/closure costs provision | 2015 | 2014 |
| € | € | |
| At 1 January | XXXXX | XXXXX |
| Utilised during the year to cover remediation costs | (XXXXX) | (XXXXX) |
| Utilised during the year to cover closure costs | (XXXXX) | (XXXXX) |
| Addition in remediation provision | XXXXXX
|
XXXXXX
|
| Provision carried at 31 December | XXXXX | XXXXX |
| Split as follows: | ||
| Amounts falling due within one year (note X) | XXXXX | XXXXX |
| Amounts falling due after one year (note X) | XXXXX
|
XXXXX
|
| XXXXX | XXXXX |
The company used a hazardous chemical in its production process up to 31 December 200X. As a result of spillages, this chemical has contaminated the soil under and around the company’s former factory. The company commissioned environmental experts who have assessed the damage, developed a program to remediate the damage, and estimated the costs involved. The remediation process is ongoing and proceeding according to an action plan agreed with the relevant authorities.
The directors have reviewed the adequacy of the remediation provision at 31 December 2015. Despite reports received from the environmental experts, the actual remaining term of the remediation programme cannot be assessed with reasonable certainty at this point in time. The company has considered the costs based on a further 10, 20 and 50 year period, weighted by probability to arrive at a provision.
The closure costs associated with the wind up of the company have also been provided for on a basis to match the probable direction of the remediation programme.
Alternative example disclosure for provisions
| 12 Provisions for liabilities | Warranty Provision
|
Redundancy provision | Onerous lease
provision |
| € | € | € | |
| At 1 January | XXXXX | XXXXX | XXXXX |
| Utilised during the year | XXXXX | XXXXX | XXXXX |
| Additions in the year | XXXXX | XXXXX | XXXXX |
| Unused amounts reversed to profit and
loss |
|||
| Capitalised in cost asset | |||
| Exchange adjustment | XXXXX | XXXXX | XXXXX |
| Unwinding of the discount (not required) | XXXX
|
XXXXX
|
XXXXX
|
| XXXXXX
|
XXXXXX
|
XXXXXXX
|
i) Maintenance warranty provision
A provision is recognised on warranty claims on products sold during the last 2 years. It is expected the majority of these will be settled in the next year and all will have settled within two years.
ii) Redundancy provision
During the year the company announced a detailed restructuring plan to cease the production of certain raw materials for its finished product and instead outsource this from the supplier. As a result of this decision, XX staff will have to be made redundant. It is expected these staff will be made redundant in the next financial year.
iii) Onerous lease
As a result of the decision to cease production, the premises in which this production was carried out is no longer required however the company is contractually committed to continue to lease the premises from the landlord for a further 5 years for which a tenant cannot be secured. As a result an onerous lease provision has been created.
Note to be included where the costs are considered exceptional in nature
| 7 Exceptional item | 2015 | 2014 |
| € | € | |
| Employee termination costs | XXXXX | – |
| Inventory write down | XXXXX | – |
| Fixed asset impairment | XXXXX
|
–
|
| XXXXXX
|
–
|
(i) The exceptional item arises from a fundamental restructuring of the company as a result of a decision to cease trading at one of the companys factories. As a result of the decision to cease certain employees are to be made redundant.
Example 27 – Extract from notes to the financial statements
(b) Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
- Contingencies
A legal action is pending against the company for alleged unfair dismissal. The directors under advisement from their legal team expect that the claim will be successfully defended. Should the company be unsuccessful in the action the maximum estimated settlement is not expected to exceed €10,000. It is not practicable as yet to state the timing of the any possible payment.
A legal case has been taken against the company, the outcome of which is uncertain. There is a contingent liability in the range of €0 to €400,000 in respect of this case. It is not practicable as yet to state the timing of the any possible payment.
A customer has commenced a legal action against the company for defective workmanship. The directors under advisement by their legal team believe that it is possible but not probable the action will succeed and therefore no provision has been made in these financial statements. Should the action succeed the estimated liability would be €100,000.
There is a potential contingent asset/liability in the future in relation to profit commission agreements entered into with various product producers. However in the opinion of the directors it is not practicable to provide an estimate of the financial effect of this contingent asset/liability as it is based on future loss ratios in relation to unsettled claims.
It is not anticipated that any material liabilities will arise from the contingent liabilities other than those provided for.
Example 28 – Extract from notes to the financial statements
(c) Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
Contingent asset
The company is currently pursuing a compensation claim due to the losses sustained as a result of restrictions placed on the company’s assets by a competitor. The claim arose as a result of the loss of earnings due to restrictions imposed on the usage of these assets. The company won a case in the High Court and were awarded damages of €XXXX and costs. The defendants have appealed the matter to the Supreme Court and the company awaits a date for the hearing of the claim. The company’s legal advisors are confident that the award of damages and costs to the company will not be overturned.
Example 29 – Extract from notes to the financial statements
A legal action is pending against the company for a claim for personal injuries. The directors under advisement from their legal team expect that the claim will be successfully defended. Any further information usually required by FRS 12 is not disclosed, because to do so would seriously prejudice the outcome of the litigation.
Disclosure about financial guarantee contracts
Extract from FRS 102 – Section 21.17
21.17A An entity shall disclose the nature and business purpose of the financial guarantee contracts it has issued. If applicable, an entity shall also provide the disclosures required by paragraphs 21.14 and 21.15.
OmniPro comment
See below an example for such a disclosure assuming the guarantee is not a contingent liability or meets the requirements for a provision.
Extract from notes to the financial statements
Off-balance sheet arrangements
The company entered into a guarantee with XYZ Bank on behalf of another group company to guarantee the loans in order to allow the subsidiary to expand its operations.
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