a liability and an expense is recognised on signing the enforceable contract,
measured at the fair value of the 5 instalments of €200,000.
• Under Option 4, the contract is unenforceable and the donation is subject to a
condition. In these circumstances, whether there is a constructive obligation to make
the donation is a matter of judgement. Management might conclude that no
constructive obligation exists until it is probable that the condition is met (which might
not be until the additional funds have been collected). Only then would a liability and
expense be recognised, measured at the net present value of the €1m promised.
• Option 5 involves an enforceable contract which may give rise to a liability when
the contract is signed. However, there is an exchange of benefits relating to the
research and development activities performed on behalf of the entity. Whether
these benefits have a value of at least the present value of the 5 instalments of
€200,000 is a matter of judgement. If it is determined that this is an exchange
transaction that is not onerous, the entity could regard the signing of the contract
as executory and could apply the criteria in IAS 38 to determine whether an asset
or expense would be recognised for the related research and development costs as
incurred (see Chapter 17 at 6.2).
Where the arrangement gives rise to an exchange transaction rather than a donation, the
expenditure incurred by the donor is recorded in accordance with the relevant IFRS.
Provisions, contingent liabilities and contingent assets 1949
6.15 Settlement
payments
A similar issue to that discussed at 6.14 above arises when an entity promises to make a
settlement payment in cases where an entity believes that there is no present legal
obligation. For example, an entity dismisses an employee for behaving in a manner
which breaches their employment contract. The entity determines that it has no present
legal obligation under the terms of the employment contract or employment law, but
promises to make a settlement payment to the former employee in order to avoid future
possible lawsuits and unfavourable publicity. It can be difficult to determine whether a
past obligating event exists that requires a provision to be recognised before payment
to the employee is made.
Where there is no legal obligation to make the payments, a liability is recognised when
a constructive obligation arises. It is a matter of judgement whether and when a
constructive obligation exists. A binding agreement to make a payment to the former
employee could give rise to a legal obligation. In the absence of facts and circumstances
that would create a constructive or legal obligation prior to settlement, the entity would
recognise the settlement as an expense when the cash is transferred.
7 DISCLOSURE
REQUIREMENTS
A significant distinction between the accounting treatment of provisions and other
liabilities, such as trade payables and accruals, is the level of disclosure required.
7.1 Provisions
For each class of provision an entity should provide a reconciliation of the carrying
amount of the provision at the beginning and end of the period showing:
(a) additional provisions made in the period, including increases to existing provisions;
(b) amounts used, i.e. incurred and charged against the provision, during the period;
(c) unused amounts reversed during the period; and
(d) the increase during the period in the discounted amount arising from the passage
of time and the effect of any change in the discount rate.
Comparative information is not required. [IAS 37.84].
It is not clear whether disclosure (d) allows a single amount to be provided for the sum of
the unwinding of the discount and any change in the provision resulting from a
reassessment of the discount rate to be used or it requires these amounts to be given
separately. However, given our view (discussed at 4.3.6 above) that only the charge for
unwinding of the discount should be classified as a finance cost, with any further charge
or credit that arises if discount rates have changed being recorded in the same line item
that was used to establish the provision, it would make sense to disclose these items
separately. It is also interesting that there is no specific requirement in the standard to
disclose the discount rate used, especially where the effect of using a different discount
rate could be material, such as in the measurement of a decommissioning provision.
However, entities should remember that IAS 1 – Presentation of Financial Statements –
requires disclosure of information about major sources of estimation uncertainty that have
1950 Chapter 27
a significant risk of resulting in a material adjustment to the carrying amounts of assets and
liabilities within the next financial year. [IAS 1.125].
One of the important disclosures which is reinforced here is the requirement to disclose
the release of provisions found to be unnecessary. This disclosure, along with the
requirement in the standard that provisions should be used only for the purpose for
which the provision was originally recognised, [IAS 37.61], is designed to prevent entities
from concealing expenditure by charging it against a provision that was set up for
another purpose.
In addition, for each class of provision an entity should disclose the following:
(a) a brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits;
(b) an indication of the uncertainties about the amount or timing of those outflows. Where
necessary to provide adequate information, an entity should disclose the major
assumptions made concerning future events, as addressed in paragraph 48 of the
standard (discussed at 4.4 above). This refers to future developments in technology and
legislation and is of particular relevance to environmental liabilities; and
(c) the amount of any expected reimbursement, stating the amount of any asset that
has been recognised for that expected reimbursement. [IAS 37.85].
Section D of the implementation guidance to the standard provides examples of suitable
disclosures in relation to warranties and decommissioning costs.
Most of the above disclosures are illustrated in the extract below, which includes the
disclosure of provisions determined in accordance with IAS
37, contingent
consideration provisions which would be determined in accordance with IFRS 3, and
employee provisions (included within Other provisions) which would be determined in
accordance with IAS 19.
Extract 27.8: Roche Holding Ltd (2017)
Notes to the Roche Group Consolidated Financial Statements [extract]
19.
Provisions and contingent liabilities [extract]
Provisions: movements in recognised liabilities in millions of CHF
Contingent
Environ-
Restruct-
considerati
Legal
mental
uring
on
Other
provisions
provisions
provisions
provisions
provisions Total
Year ended 31 Dec
ember 2016
At 1 January 2016
700
585
621
1,492
1,238
4,636
Additional provisions created
59 38 405 39 428
969
Unused amounts reversed
(23)
–
(110)
(447)
(269)
(849)
Utilised (53)
(119) (240) (69) (355) (836)
Discount unwind3
– 10 – 53 2
65
Business
combinations
– Acquired
companies5
– – – – –
–
– Deferred
consideration5 –
–
–
–
–
–
– Contingent
consideration5
– – – – –
–
Currency translation effects
22
4
(2)
21
18
63
At 31 December 2016
705
518
674
1,089
1,062
4,048
Provisions, contingent liabilities and contingent assets 1951
Current
677 111 376 330 777
2,271
Non-current
28 407 298 759 285
1,777
At 31 December 2016
705
518
674
1,089
1,062
4,048
Year ended 31 December 2017
At 1 January 2017
705
518
674
1,089
1,062
4,048
Additional provisions created
60 68 543 13 523
1,207
Unused amounts reversed
(219)
(4)
(167)
(366)
(181)
(937)
Utilised (37)
(81) (259) (146) (249) (772)
Discount unwind3
– 4 – 14 2
20
Business
combinations
– Acquired
companies5
– – – – –
–
– Deferred
consideration5
– – – – 8
8
– Contingent
consideration5
– – – 10 –
10
Currency translation effects
(24)
18
31
(23)
4
6
At 31 December 2017
485
523
822
591
1,169
3,590
Current
471 119 450 182 820
2,042
Non-current
14 404 372 409 349
1,548
At 31 December 2017
485
523
822
591
1,169
3,590
Expected outflow of resources
Within one year
471
119
450
182
820
2,042
Between one and two years
8
164
193
103
56
524
Between two and three years
1
138
98
94
67
398
More than three years
5
102
81
212
226
626
At 31 December 2017
485
523
822
591
1,169
3,590
The Group has revised the presentation of provisions. Contingent consideration provisions are now presented
separately and employee provisions are now included as part of ‘Other provisions’. The comparative period
information has been restated accordingly. […]
Legal provisions
Legal provisions consist of a number of separate legal matters, including claims arising from trade, in various Group
companies. By their nature the amounts and timings of any outflows are difficult to predict.
As part of the regular review of litigation matters, management has reassessed the provisions recorded for certain
litigation matters. Based on the development of the various litigations, notably the Accutane case, some of the
provisions previously held were released, resulting in income of CHF 219 million in 2017. This was a major element
in the 2017 legal expenses, which show a net income of CHF 142 million (2016: net expense of CHF 39 million).
Details of the major legal cases outstanding are disclosed below.
Environmental provisions
Provisions for environmental matters include various separate environmental issues in a number of countries. By their
nature the amounts and timings of any outflows are difficult to predict. Significant provisions are discounted by
between 2% and 4% where the time value of money is material. The significant provisions relate to the US site in
Nutley, New Jersey, which was divested in September 2016, the estimated remediation costs for a landfill site near
Grenzach, Germany, that was used by manufacturing operations that were closed some years ago and the estimated
remediation costs for the manufacturing site at Clarecastle, Ireland. In 2017 the expected costs of environmental
remediation at the Clarecastle site were reassessed and accordingly the environmental provisions were increased by
CHF 46 million. This was a major element of the 2017 environmental expenses, which show a net expense of CHF
62 million (2016: net expense of CHF 38 million). […]
1952 Chapter 27
Restructuring provisions
These arise from planned programmes that materially change the scope of business undertaken by the Group or the
manner in which business is conducted. Such provisions include only the costs necessarily entailed by the restructuring
which are not associated with the recurring activities of the Group. The timings of these cash outflows are reasonably
certain. These provisions are not discounted as the time value of money is not material in these matters.
In the Pharmaceuticals Division the significant provisions relate to the strategic realignment of the manufacturing
network including exiting from four manufacturing sites, the resourcing flexibility plans to address various future
challenges including biosimilar competition, the research and development strategic realignment and the outsourcing
of IT functions to shared service centres and external providers (see Note 6).
Other provisions
Other provisions relate to items shown in the table below. With the exception of employee provisions, the timing of
cash outflows is by its nature uncertain.
Other provisions in millions of CHF
2017 2016 2015
Employee provisions
362
345
313
Sales returns
366
436
616
Other items
441
281
309
Total other provisions
1,169
1,062
1,238
The standard states that in determining which provisions may be aggregated to form a
class, it is necessary to consider whether the nature of the items is sufficiently similar
for a single statement about them to fulfil the requirements of (a) and (b) above. An
example is given of warranties: it is suggested that, while it may be appropriate to treat
warranties of different products as a single class of provision, it would not be
appropriate to aggregate normal warranties with amounts that are subject to legal
proceedings. [IAS 37.87]. For entities disclosing restructuring costs, this requirement could
result in material components of the costs being disclosed separately. However,
materiality will be an important consideration in judging how much analysis is required.
As indicated at 6.1.1 above, IAS 37 emphasises that when a restructuring meets the
definition of a discontinued operation under IFRS 5, additional disclosures may be
required under that standard (see Chapter 4 at 3). [IAS 37.9].
7.2 Contingent
liabilities
Unless the possibility of any outflow in settlement is remote, IAS 37 requires the
disclosure for each class of contingent liability at the end of the reporting period to
include a brief description of the nature of the contingent liability, and where
practicable:
(a) an estimate of its financial effect, measured in accordance with paragraphs 36-52
of IAS 37 (discussed at 4 above);
(b) an indication of the uncertainties relating to the amount or timing of any outflow; and
(c) the possibility of any reimbursement. [IAS 37.86].
Where any of the information above is not disclosed because it is not practicable to do
so, that fact should be stated. [IAS 37.91].
Provisions, contingent liabilities and contingent assets 1953
The guidance given in the standard on determining which provisions may be aggregated
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 385