GOVERNMENT ACCOUNTING MANUAL

(For National Government Agencies)

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 1 of 27
 Session 9
Provisions, Contingent
Liabilities and Contingent
Asset

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 Session Overview

•Provisions
•Contingent Liabilities
•Contingent Assets

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 Learning Objective

At the end of the session you will be

able to apply the accounting policies on
provisions, contingent liabilities and
contingent assets.

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 4 of 27
 1) It is an obligation which is derived from an entity’s action
where the entity has created a valid expectation on the part of
other parties that it will discharge from responsibilities.

a. Contingent Asset
b. Constructive Obligation
c. Provision
d. Contingent Liabilities

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 5 of 27
 2) Contingent
______________is
Liability a possible obligation that
arises from past event and 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 entity.

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 6 of 27
 3) It is an obligation that derives from contract,
legislation or other operations of law.

a. Executory contracts
b. Obligating event
c. Legal obligation
d. Constructive Obligation

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 7 of 27
 Provision
4) __________________ is a liability of uncertain timing or
amount.

Contingent Asset is a possible asset that arises from past

5) __________________
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 control of the entity.

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 8 of 27
 Onerous Contract is a contract for the exchange of assets or
6) __________________
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.

Restructuring
7) __________________ is a program that is planned and
controlled by management, and materially changes either the
scope of an entity’s activities or the manner in which those
activities are carried out.

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 Provision

- is a liability of uncertain
timing or amount.

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 Examples of Provisions

• Onerous contracts;
• Restructuring provisions;
• Warranties;
• Refunds, and;
• Site restoration.

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 11 of 27
 Exercise
Provisions A

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 12 of 27
 Accounting for Provision

present obligation (legal or

constructive) as a result of a past event;

probable that an outflow of resources embodying

Criteria for economic benefits or service potential will be
Recognition required to settle the obligation; and

Reliable estimate can be made of the

amount of the obligation.

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 Accounting for Provision

• Present obligation
 Legal Obligation – Statutory requirement
 Constructive - entity’s action
• Probable – more likely than not, ie.more than 50 %
• Ability to measure reliably -reliable estimate

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 Accounting for Provision

• Effluent discharged from an entity’s manufacturing

process contaminates the river located where the
entity operates. The entity is not required by law to
restore the contaminated river and there is no case
filed yet. However, before the end of the current
reporting period the entity made a public
announcement that it would restore the contaminated
river within the next 12 months. The best estimate of
the cost of restoration amounts to P100,000.

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 Accounting for Provision

• determined by the judgment of the

INITIAL management, experience and/or
MEASUREMENT reports from independent experts
• risks and uncertainties
Best • time value of money or the present
value of the expenditures
Estimate • Future events
• Expected Disposal of Assets

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 Accounting for Provision

•Adjusted to reflect the

SUBSEQUENT current best estimate
MEASUREMENT •Future events be
Current Best reflected
Estimate •Reverse, if no longer
probable
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 Accounting for Provision
ONEROUS CONTRACT
-present obligation, net of recoveries
RESTRUCTURING
-detailed formal plan
-implementation

Future Operation Net Deficits

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GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 19 of 27
 NAME OF ENTITY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2015

Note 19: Provisions

Particulars Warranty Restoration Refund Total
Carrying amount, 1,000,000
Jan. 1,2015
Current 50,000 400,000 100,000 550,000
Non-current 50,000 300,000 100,000 450,000
Additional Provisions 400,000
Current 100,000 50,000 50,000
Non-current 100,000 50,000 50,000

Provisions Used/Charged
Current 50,000 400,000 100,000
Non-current 50,000 200,000 100,000

Provisions Reversed
Current
Non-current 100,000
Carrying amount
Dec.31, 2015 400,000
Current 100,000 50,000 50,000 200,000
Non-current 100,000 50,000 50,000 200,000
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 Disclosure

In addition, an entity shall also disclose the following for each class
of provision:
• Description of the nature of the obligation and timing of any
resulting outflows of economic benefits;
• Indication of the uncertainties and major assumptions of future
events; and
• Amount of any expected reimbursement, the amount of any asset
that has been recognized for that expected reimbursement.

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 Contingent Liability

• Possible obligation arises from past events and its

existence will be confirmed only by the occurrence and
non-occurrence uncertain future events.
• Present obligation that is not recognized as provision.

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 Exercise
Provisions B

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 Contingent Liability VS Provision

Contingent Liability is
disclosed : Provision is recognized :
-present obligation -present obligation
-an outflow of resources
-either an outflow of is probable
resources is not probable -amount of the
or the amount of the obligation can be
obligation cannot be
estimated reliably.
estimated reliably.

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 Contingent Asset

A possible asset arises from past events, and

its existence will be confirmed only by the
occurrence or non-occurrence of uncertain
future events.

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GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 26 of 27
 Presentation and Disclosure

A contingent liability is
disclosed unless A contingent asset is
possibility of an either:
outflow of resources
embodying economic disclosed.
benefits or service the related asset is
potential is remote. recognized.

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 Exercise
Provisions C

GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 28 of 27
 D
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GAM: Accounting Session 14: Provisions, Contingent Liabilities and Contingent Assets Slide 30 of 27