Topic 205 - Provisions, contingent liabilities and contingent assets

This topic includes FAQs relating to the following IFRS standards, IFRIC Interpretations and SIC Interpretations:

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment

IFRIC 21 Levies

Other resources

  • IFRS At a Glance by standard is available here

 

Sub-topic within this main topic are set out below, with links to IFRS Interpretation Committee agenda decisions and BDO IFRS FAQs relating to that sub-topic below each sub-topic:

Sub-topic Number Sub-topic and Related FAQ
205.1 Scope and definitions
  • 205.1.1.1
  • 205.1.1.2
  • 205.1.1.3
205.2 Relationship between provisions and contingent liabilities
205.3 Provisions
  • 205.3.1.1 
205.4 Contingent liabilities
205.5 Contingent assets
205.6 Measurement
  • 205.6.1.1
  • 205.6.1.2
205.7 Reimbursements
205.8 Changes in provisions and use of provisions
205.9 Future operating losses, onerous contracts and restructuring
205.10 Disclosure
205.11 Other issues
  • 205.11.1.1
  • 205.11.1.2

 

FAQ#

Title

Text of FAQ

205.1.1.1

IFRIC Agenda Decision - Deposits on returnable containers

May 2008 - The IFRIC was asked to provide guidance on the accounting for the obligation to refund deposits on returnable containers. In some industries, entities that distribute their products in returnable containers collect a deposit for each container delivered and have an obligation to refund this deposit when containers are returned by the customer. The issue was whether the obligation should be accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

 

The IFRIC noted that paragraph 11 of IAS 32 Financial Instruments: Presentation defines a financial instrument as ‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.’ Following delivery of the containers to its customers, the seller has an obligation only to refund the deposit for any returned containers.

 

In circumstances in which the containers are derecognised as part of the sale transaction, the obligation is an exchange of cash (the deposit) for the containers (non‑financial assets). Whether that exchange transaction occurs is at the option of the customer. Because the transaction involves the exchange of a non‑financial item, it does not meet the definition of a financial instrument in accordance with IAS 32.

In contrast, when the containers are not derecognised as part of the sale transaction, the customer’s only asset is its right to the refund. In such circumstances, the obligation meets the definition of a financial instrument in accordance with IAS 32 and is therefore within the scope of IAS 39. In particular, paragraph 49 of IAS 39 states that ‘the fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.’

The IFRIC concluded that divergence in this area was unlikely to be significant and therefore decided not to add this issue to its agenda.

Back to sub-topic index

205.1.1.2

IFRIC Agenda Decision - Interest and penalties related to income taxes

September 2017 - IFRS Standards do not specifically address the accounting for interest and penalties related to income taxes (interest and penalties). In the light of the feedback received on the draft IFRIC Interpretation Uncertainty over Income Tax Treatments, the Committee considered whether to add a project on interest and penalties to its standard-setting agenda.

On the basis of its analysis, the Committee concluded that a project on interest and penalties would not result in an improvement in financial reporting that would be sufficient to outweigh the costs. Consequently, the Committee decided not to add a project on interest and penalties to its standard-setting agenda.

Nonetheless, the Committee observed that entities do not have an accounting policy choice between applying IAS 12 and applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets to interest and penalties. Instead, if an entity considers a particular amount payable or receivable for interest and penalties to be an income tax, then the entity applies IAS 12 to that amount. If an entity does not apply IAS 12 to a particular amount payable or receivable for interest and penalties, it applies IAS 37 to that amount. An entity discloses its judgement in this respect applying paragraph 122 of IAS 1 Presentation of Financial Statements if it is part of the entity’s judgements that had the most significant effect on the amounts recognised in the financial statements.

Paragraph 79 of IAS 12 requires an entity to disclose the major components of tax expense (income); for each class of provision, paragraphs 84⁠–⁠85 of IAS 37 require a reconciliation of the carrying amount at the beginning and end of the reporting period as well as other information. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material.

The Committee also observed it had previously published agenda decisions discussing the scope of IAS 12 in March 2006 and May 2009.

Back to sub-topic index

205.1.1.3

IFRIC Agenda Decision - Deposits relating to taxes other than income tax

January 2019 - The Committee received a request about how to account for deposits relating to taxes that are outside the scope of IAS 12 Income Taxes (ie deposits relating to taxes other than income tax). In the fact pattern described in the request, an entity and a tax authority dispute whether the entity is required to pay the tax. The tax is not an income tax, so it is not within the scope of IAS 12. Any liability or contingent liability to pay the tax is instead within the scope of IAS 37. Taking account of all available evidence, the preparer of the entity’s financial statements judges it probable that the entity will not be required to pay the tax—it is more likely than not that the dispute will be resolved in the entity’s favour. Applying IAS 37, the entity discloses a contingent liability and does not recognise a liability. To avoid possible penalties, the entity has deposited the disputed amount with the tax authority. Upon resolution of the dispute, the tax authority will be required to either refund the tax deposit to the entity (if the dispute is resolved in the entity’s favour) or use the deposit to settle the entity’s liability (if the dispute is resolved in the tax authority’s favour).

 

Whether the tax deposit gives rise to an asset, a contingent asset or neither

The Committee observed that if the tax deposit gives rise to an asset, that asset may not be clearly within the scope of any IFRS Standard. Furthermore, the Committee concluded that no IFRS Standard deals with issues similar or related to the issue that arises in assessing whether the right arising from the tax deposit meets the definition of an asset. Accordingly, applying paragraphs 10⁠–⁠11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Committee referred to the two definitions of an asset in IFRS literature—the definition in the Conceptual Framework for Financial Reporting issued in March 2018 and the definition in the previous Conceptual Framework that was in place when many existing IFRS Standards were developed. The Committee concluded that the right arising from the tax deposit meets either of those definitions. The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability. The nature of the tax deposit—whether voluntary or required—does not affect this right and therefore does not affect the conclusion that there is an asset. The right is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity.

Consequently, the Committee concluded that in the fact pattern described in the request the entity has an asset when it makes the tax deposit to the tax authority.

Recognising, measuring, presenting and disclosing the tax deposit

In the absence of a Standard that specifically applies to the asset, an entity applies paragraphs 10⁠–⁠11 of IAS 8 in developing and applying an accounting policy for the asset. The entity’s management uses its judgement in developing and applying a policy that results in information that is relevant to the economic decision-making needs of users of financial statements and reliable. The Committee noted that the issues that need to be addressed in developing and applying an accounting policy for the tax deposit may be similar or related to those that arise for the recognition, measurement, presentation and disclosure of monetary assets. If this is the case, the entity’s management would refer to requirements in IFRS Standards dealing with those issues for monetary assets.

The Committee concluded that the requirements in IFRS Standards and concepts in the Conceptual Framework for Financial Reporting provide an adequate basis for an entity to account for deposits relating to taxes other than income tax. Consequently, the Committee decided not to add this matter to its standard-setting agenda.

Back to sub-topic index

205.3.1.1 

IFRIC Agenda Decision - Negative Low Emission Vehicle Credits

July 2022 - The Committee received a request asking whether particular measures to encourage reductions in vehicle carbon emissions give rise to obligations that meet the definition of a liability in IAS 37. 

 

The request 

The request described government measures that apply to entities that produce or import passenger vehicles for sale in a specified market. Under the measures, entities receive positive credits if, in a calendar year, they have produced or imported vehicles whose average fuel emissions are lower than a government target. Entities receive negative credits if, in that year, they have produced or imported vehicles whose average fuel emissions are higher than the target. 

The measures require an entity that receives negative credits for one year to eliminate these negative credits by obtaining and surrendering positive credits. The entity can obtain positive credits either by purchasing them from another entity or by generating them itself in the next year (by producing or importing more low-emission vehicles). If the entity fails to eliminate its negative credits, the government can impose sanctions on the entity. These sanctions would not require payment of fines or penalties, or any other outflow of resources embodying economic benefits, but could deny the entity opportunities in the future, for example by restricting the entity’s access to the market. 

The request considered the position of an entity that has produced or imported vehicles with average fuel emissions higher than the government target, and asked whether such an entity has a present obligation that meets the definition of a liability in IAS 37. 

 

Applicable requirements 

Paragraph 10 of IAS 37: 

a. defines a liability as ‘a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits’; 

b. distinguishes legal obligations (which derive from a contract, legislation or other operation of law) from constructive obligations (which derive from an entity’s actions); and 

c. defines an obligating event as ‘an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation’. 

An entity has no realistic alternative to settling an obligation only where settlement can be enforced by law or, in the case of a constructive obligation, where the entity’s actions have created valid expectations in other parties that the entity will discharge the obligation (paragraph 17 of IAS 37). 

 

The Committee observed that, in determining whether it has a liability, the entity described in the request would consider: 

a. whether settling an obligation to eliminate negative credits would result in an outflow of resources embodying economic benefits; 

b. which event creates a present obligation to eliminate negative credits; and 

c. whether the entity has no realistic alternative to settling the obligation. 

 

The Committee’s conclusions 

Outflow of resources embodying economic benefits 

An entity can settle an obligation to eliminate negative credits either by purchasing credits from another entity or by generating positive credits itself in the next year. The Committee concluded that either method of settling the obligation would result in an outflow of resources embodying economic benefits. These resources are the positive credits the entity would surrender to eliminate the negative balance. The entity could otherwise have used self-generated positive credits for other purposes—for example, to sell to other entities with negative credits. 

 

The event that creates a present obligation 

The definition of a liability in IAS 37 requires an entity to have a ‘present obligation … arising from past events’. Paragraph 19 of IAS 37 adds that it is only those obligations arising from past events existing independently of an entity’s future actions that meet the definition of a liability. Two IFRIC Interpretations of IAS 37 provide further relevant requirements—they address specific types of government-imposed charges and specify which events give rise to a present obligation for these types of charges: 

a. IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment addresses a charge for the cost of waste management. Legislation links the charge to an entity’s participation in a specified market in a specified period. The consensus in IFRIC 6 is that an obligation arises when an entity conducts the activity to which the charge is linked. 

b. IFRIC 21 Levies addresses levies imposed by governments. The consensus in IFRIC 21 is that the event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified in the applicable legislation. 

 

In the fact pattern described in the request, the activity that triggers a requirement to eliminate negative credits (or in other words, the activity to which the measures link that requirement) is the production or import of vehicles with average fuel emissions higher than the government target. If in a calendar year an entity has produced or imported vehicles with average fuel emissions higher than the government target, an obligation: 

a. has arisen from past events. 

b. exists independently of the entity’s future actions (the future conduct of its business). The entity’s future actions will determine only the means by which the entity settles its present obligation—whether it purchases positive credits from another entity or generates positive credits itself by producing or importing more low-emission vehicles. 

Therefore, the Committee concluded that, in the fact pattern described in the request, the activity that gives rise to a present obligation is the production or import of vehicles whose fuel emissions, averaged for all the vehicles produced or imported in that calendar year, are higher than the government target. 

The Committee observed that a present obligation could arise at any date within a calendar year (on the basis of the entity’s production or import activities to that date), not only at the end of the calendar year. 

 

No realistic alternative to settling an obligation 

The Committee concluded that the measures described in the request could give rise to a legal obligation: 

a. obligations that arise under the measures derive from an operation of law; and 

b. the sanctions the government can impose under the measures would be the mechanism by which settlement may be enforceable by law. 

An entity would have a legal obligation that is enforceable by law if accepting the possible sanctions for non-settlement is not a realistic alternative for that entity. 

The Committee observed that determining whether accepting sanctions is a realistic alternative for an entity requires judgement—the conclusion will depend on the nature of the sanctions and the entity’s specific circumstances. 

 

The possibility of a constructive obligation 

The Committee concluded that, if an entity determines that it has no legal obligation to eliminate its negative credits, it would then need to consider whether it has a constructive obligation to do so. It would have a constructive obligation if it has both: 

a. in a calendar year, produced or imported vehicles with average fuel emissions higher than the government target; and 

b. taken an action that creates valid expectations in other parties that it will eliminate the resulting negative credits—for example, made a sufficiently specific current statement that it will do so. 

 

Other IAS 37 requirements 

The request asked only whether the government measures give rise to obligations that meet the definition of a liability in IAS 37. The Committee observed that, having identified such an obligation, an entity would apply other requirements in IAS 37 to determine how to measure the liability. The Committee did not discuss these other requirements. 

The Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine whether, in the fact pattern described in the request, it has an obligation that meets the definition of a liability in IAS 37. Consequently, the Committee decided not to add a standard-setting project to the work plan. 

Back to sub-topic index

205.6.1.1

IFRIC Agenda Decision - Inclusion of own credit risk in discount rate

March 2011 - The Interpretations Committee received a request for interpretation of the phrase ‘the risks specific to the liability’ and whether this means that an entity’s own credit risk (performance risk) should be excluded from any adjustments made to the discount rate used to measure liabilities. The request assumed that future cash flow estimates have not been adjusted for the entity’s own credit risk.

The Committee observed that paragraph 47 of IAS 37 states that ‘risks specific to the liability’ should be taken into account in measuring the liability. The Committee noted that IAS 37 does not explicitly state whether or not own credit risk should be included. The Committee understood that the predominant practice today is to exclude own credit risk, which is generally viewed in practice as a risk of the entity rather than a risk specific to the liability.

The Committee also noted that this request for guidance would be best addressed as part of the Board’s project to replace IAS 37 with a new liabilities standard, and that the Board is already considering the request for additional guidance to be incorporated into this new standard. For this reason, the Committee decided not to add this issue to its agenda.

Back to sub-topic index

205.6.1.2

IFRIC Agenda Decision - Measurement of liabilities arising from emission trading schemes

May 2014 - The Interpretations Committee received a request to clarify the measurement of a liability under IAS 37 that arises from an obligation to deliver allowances in an emission trading scheme.

The request asked whether the measurement of the liability for the obligation to deliver allowances should reflect current values of allowances at the end of each reporting period if IAS 37 was applied to the liability. The request noted that this was the basis required by  IFRIC 3 Emission Rights, which was withdrawn in June 2005.

The Interpretations Committee noted that when the IASB withdrew IFRIC 3, it affirmed that IFRIC 3 was an appropriate interpretation of existing IFRS for accounting for the emission trading schemes that were within the scope of IFRIC 3. However, the IASB acknowledged that, as a consequence of following existing IFRS, IFRIC 3 had created unsatisfactory measurement and reporting mismatches between assets and liabilities arising from emission trading schemes.

In 2012, the IASB added to its agenda a research project on the accounting for emissions trading schemes. The Interpretations Committee noted that one of the main issues in the IASB’s project on emission trading schemes was whether the accounting for the liabilities arising from emission trading schemes should be considered separately from the accounting for the assets. Consequently, the Interpretations Committee noted that to provide an interpretation of IFRS on the measurement of a liability arising from the obligation to deliver allowances related to an emission trading scheme would be too broad an issue for it to deal with.

On the basis of this analysis, the Interpretations Committee decided not to add this issue to its agenda.

Back to sub-topic index

205.11.1.1

IFRIC Agenda Decision - IFRIC 21 Levies—identification of a present obligation to pay a levy that is subject to a pro rata activity threshold as well as an annual activity threshold

March 2014 - In May 2013, the IASB issued IFRIC 21 Levies, which is effective for annual periods beginning on or after 1 January 2014, with earlier application permitted. IFRIC 21 provides an interpretation of the requirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets for the recognition of liabilities for obligations to pay levies that are within the scope of IFRIC 21.

The Interpretations Committee received a request to clarify how the requirements in paragraph 8 of IFRIC 21 should be interpreted in identifying an obligating event for a levy. The Interpretations Committee discussed regimes in which an obligation to pay a levy arises as a result of activity during a period but is not payable until a minimum activity threshold, as identified by the legislation, is reached. The threshold is set as an annual threshold, but this threshold is reduced, pro rata to the number of days in the year that the entity participated in the relevant activity, if its participation in the activity started or stopped during the course of the year. The request asks for clarification on how the thresholds stated in the legislation should be taken into consideration when deciding “the activity that triggers the payment of the levy” in paragraph 8 of IFRIC 21.

The Interpretations Committee noted that in the circumstance described above, the payment of the levy is triggered by the reaching of the annual threshold as identified by the legislation. The Interpretations Committee also noted that the entity would be subject to a threshold that is lower than the threshold that applies at the end of the annual assessment period if, and only if, the entity stops the relevant activity before the end of the annual assessment period. Accordingly, the Interpretations Committee observed that in the light of the guidance in paragraph 12 of IFRIC 21, the obligating event for the levy is the reaching of the threshold that applies at the end of the annual assessment period. The Interpretations Committee noted that there is a distinction between a levy with an annual threshold that is reduced pro rata when a specified condition is met and a levy for which an obligating event occurs progressively over a period of time as described in paragraph 11 of IFRIC 21; until the specified condition is met, the pro rata reduction in the threshold does not apply.

On the basis of the discussions above, the Interpretations Committee thought that the guidance in IFRIC 21 and IAS 37 is sufficient and noted that it is unlikely that significant diversity in interpretation on this issue will emerge. Accordingly, the Interpretations Committee decided not to add this issue to its agenda.

Back to sub-topic index

205.11.1.2

IFRIC Agenda Decision - IFRIC 21 Levies—levies raised on production property, plant and equipment

January 2015 - The Interpretations Committee received two submissions relating to levies raised on production property, plant and equipment (PPE).

Paragraph 3 of IFRIC 21 Levies states that the Interpretation does not provide guidance on accounting for the costs arising from recognising a levy. The Interpretation notes that entities should apply other Standards to decide whether the recognition of an obligation for a levy gives rise to an asset or to an expense. The submitters, both service providers, asked whether the cost of a levy on productive assets is:

(a)

an administrative cost to be recognised as an expense as it is incurred; or

(b)

a fixed production overhead to be recognised as part of the cost of the entity’s inventory in accordance with IAS 2 Inventories.

 

The Interpretations Committee noted that when IFRIC 21 was being developed it had discussed the accounting for costs that arise from recognising the liability for a levy. At that time it had considered whether such costs would be recognised as an expense, a prepaid expense or as an asset recognised in accordance with IAS 2, IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets. The Interpretations Committee decided not to provide guidance on this matter; entities should apply other Standards to decide whether the recognition of a liability to pay a levy gives rise to an asset or to an expense. The Interpretations Committee also noted that IFRIC 21 is an Interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets and that paragraph 8 of IAS 37 states that IAS 37 does not deal with the recognition of either the asset or expense associated with a liability. It also noted that it would not be efficient to give case‑by‑case guidance based on the fact patterns of individual levies.

 

Consequently, the Interpretations Committee decided not to add this issue to its agenda.

Back to sub-topic index

 

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Neither BDO IFR Advisory Limited, and/or any other entity of BDO network, nor their respective partners, employees and/or agents accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

The BDO network (referred to as the ‘BDO network’ or the ‘Network’) is an international network of independent public accounting, tax and advisory firms which are members of BDO International Limited and perform professional services under the name and style of BDO (hereafter ‘BDO member firms’). BDO International Limited is a UK company limited by guarantee.  It is the governing entity of the BDO network. 

Service provision within the BDO network in connection with IFRS (comprising International Financial Reporting Standards, International Accounting Standards, and Interpretations developed by the IFRS Interpretations Committee and the former Standing Interpretations Committee), and other documents, as issued by the International Accounting Standards Board, is provided by BDO IFR Advisory Limited, a UK registered company limited by guarantee. Service provision within the BDO network is coordinated by Brussels Worldwide Services BV, a limited liability company incorporated in Belgium.

Each of BDO International Limited, Brussels Worldwide Services BV, BDO IFR Advisory Limited and the BDO member firms is a separate legal entity and has no liability for another entity’s acts or omissions. Nothing in the arrangements or rules of the BDO network shall constitute or imply an agency relationship or a partnership between BDO International Limited, Brussels Worldwide Services BV, BDO IFR Advisory Limited and/or the BDO member firms. Neither BDO International Limited nor any other central entities of the BDO network provide services to clients.

BDO is the brand name for the BDO network and for each of the BDO member firms.