EXPOSURE DRAFT 21 - PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Proposed International Public Sector Accounting Standard
Comments from the Association of Chartered Certified Accountants
November 2001
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on ED 20, Provisions, Contingent Liabilities and Contingent Assets. These comments have been prepared in consultation with members of the ACCA's Public Sector Technical Issues Committee, a group of experienced accountants working in the public sector.ACCA is concerned that major areas, including, social benefits, pensions, and income taxes, have been excluded from the scope of the proposed standard. We question the wisdom of issuing the proposed standard before agreement is reached on the accepted accounting practice for the most significant contingent liabilities which public sector entities face.
We believe that more consideration needs to be given to reporting environmental liabilities, especially where the financial implications cannot be measured reliably.
Specific Matters for Comment
Should social benefits (health, education and welfare payments) be excluded from the Standard?1. We believe that this proposed standard shows some of the difficulties of adopting the accruals basis in the public sector. Major liabilities, including social benefits, pensions and income taxes, have been excluded from the scope of the proposed standard. Pensions and income taxes will be dealt with once the related International Accounting Standards are considered. Social benefits will, however, have to be considered separately as there are no comparable transactions in the private sector.
2. ACCA is concerned that IFAC is proposing to issue an accounting standard which excludes from its scope a number of issues which are material in public sector financial statements. It should be recognised that the application of the accruals basis in the public sector is still at the developmental stage and that the recommended approach has yet to be agreed for significant areas which may be considered to fall within the scope of this proposed standard.
Should the Standard include disclosure requirements for contingent assets?
3. We believe that the proposed standard should include disclosure requirements for contingent assets.
Should the Standard limit the application of provisions for onerous contracts in the Standard to contracts which were entered into with the expectation that the contract would provide approximately equal value to both parties? Comments are sought on whether the clarification of the provisions dealing with onerous contracts is helpful.
4. We believe that the proposed standard should not limit the application of provisions for onerous contracts to contracts which were entered into in the expectation that they would provide approximately equal value to both parties. We believe that details of contingent liabilities from all onerous contracts should be included within the notes to the financial statements.
5. We support the view that the net amount is the appropriate measurement approach to take for onerous contracts. Paragraph 76 of the proposed standard should be amended to make this explicit. In addition, we believe that an example of such treatment should be included in the proposed standard.
Should the Standard require the present obligation arising from onerous contracts to be recognised as a provision?
6. We believe that the proposed standard should require the present obligation arising from onerous contracts to be recognised as a provision where the obligation will probably require the outflow of resources.
Are the additional examples included useful?
7. We believe that the additional examples on the identification of provisions within the public sector (Appendix C) are useful and should be included in the proposed standard.
What guidance should the Standard provide on the discount rate to use for future payments?
8. We believe that the proposed standard should include guidance on the circumstances in which discounting should be used and the methodology which should be adopted to calculate the discount rate in these cases (paragraph 70).
Should the Standard exclude liabilities arising from employee benefits and income taxes?
9. We believe that the proposed standard should not be adopted until agreement is reached on practical and accepted accounting practice for the most significant contingent liabilities which public sector organisations face. This should include the treatment of liabilities arising from employee benefits, income taxes and social benefits.
Should the Standard specify the "obligating event" for an obligation arising from legislation as the point when it is "virtually certain to be enacted as drafted"?
10. ACCA believes that the proposed standard should specify the "obligating event" for an obligation arising from legislation as the point when it is finally enacted, but possibly before the legislation comes in to force. This should provide greater comparability between jurisdictions which have a "variety of circumstances that arise in practice" (paragraph 60) and should recognise that in "many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted, (paragraph 30).
Additional Issue
Environmental liabilities11. ACCA believes that the treatment of environmental liabilities would benefit from clearer guidance. The proposed standard discusses the situation where an environmental impact is recognised but the financial implications may, initially, be unknown. In these circumstances, quantifying the liability or impact in environmental terms might serve as a useful step towards recognising the costs of the issues for society. Guidelines on reporting environmental impacts are being developed (e.g. through the Global Reporting Initiative) and it would be useful for IFAC to refer to these as appropriate.