Changes in provisions

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be

required to settle the obligation, the provision shall be reversed.

Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as borrowing cost.

Use of provisions

A provision shall be used only for expenditures for which the provision was originally recognised.

Only expenditures that relate to the original provision are set against it. Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events.

Application of the recognition and measurement rules

Future operating losses

Provisions shall not be recognised for future operating losses.

Future operating losses do not meet the definition of a liability in paragraph 10 and the general recognition criteria set out for provisions in paragraph 14.

An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An entity tests these assets for impairment under IAS 36 Impairment of Assets.

Onerous contracts

If an entity has a contract that is onerous, the present obligation under

the contract shall be recognised and measured as a provision.

Many contracts (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this Standard and a liability exists which is recognised. Executory contracts that are not onerous fall outside the scope of this Standard.

This Standard defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.

Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets dedicated to that contract (see IAS 36).


The following are examples of events that may fall under the definition of


sale or termination of a line of business;

the closure of business locations in a country or region or the relocation

of business activities from one country or region to another;

changes in management structure, for example, eliminating a layer of

management; and

fundamental reorganisations that have a material effect on the nature

and focus of the entity's operations.

              A provision for restructuring costs is recognised only when the general

recognition criteria for provisions set out in paragraph 14 are met. Paragraphs 72-83 set out how the general recognition criteria apply to restructurings.

             A constructive obligation to restructure arises only when an entity:

         has a detailed formal plan for the restructuring identifying at least:

the business or part of a business concerned;

the principal locations affected;

the location, function, and approximate number of employees who will be compensated for terminating their


the expenditures that will be undertaken; and

when the plan will be implemented; and

         has raised a valid expectation in those affected that it will carry

out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

Evidence that an entity has started to implement a restructuring plan would be provided, for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan. A public announcement of a detailed plan to restructure constitutes a constructive obligation to restructure only if it is made in such a way and in sufficient detail (ie setting out the main features of the plan) that it gives rise to valid expectations in other parties such as customers, suppliers and employees (or their representatives) that the entity will carry out the restructuring.

For a plan to be sufficient to give rise to a constructive obligation when communicated to those affected by it, its implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely. If it is expected that there will be a long delay before the restructuring begins or that the restructuring will take an

unreasonably long time, it is unlikely that the plan will raise a valid expectation on the part of others that the entity is at present committed to restructuring, because the timeframe allows opportunities for the entity to change its plans.

              A management or board decision to restructure taken before the end of the

reporting period does not give rise to a constructive obligation at the end of the

reporting period unless the entity has, before the end of the reporting period:

          started to implement the restructuring plan; or

          announced the main features of the restructuring plan to those affected

by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring.

If an entity starts to implement a restructuring plan, or announces its main

features to those affected, only after the reporting period, disclosure is required under IAS 10 Events after the Reporting Period, if the restructuring is material and

non-disclosure could influence the economic decisions that users make on the basis of the financial statements.

              Although a constructive obligation is not created solely by a management

decision, an obligation may result from other earlier events together with such a

decision.      For example, negotiations with employee representatives for

termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met.

In some countries, the ultimate authority is vested in a board whose membership includes representatives of interests other than those of management (eg employees) or notification to such representatives may be necessary before the board decision is taken. Because a decision by such a board involves communication to these representatives, it may result in a constructive obligation to restructure.

No obligation arises for the sale of an operation until the entity is committed to the sale, ie there is a binding sale agreement.

Even when an entity has taken a decision to sell an operation and announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. Until there is a binding sale agreement, the entity will be able to change its mind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for impairment, under IAS 36. When a sale is only part of a restructuring, a constructive obligation can arise for the other parts of the restructuring before a binding sale agreement exists.

A restructuring provision shall include only the direct expenditures

arising from the restructuring, which are those that are both:

          necessarily entailed by the restructuring; and

          not associated with the ongoing activities of the entity.

              A restructuring provision does not include such costs as:

         retraining or relocating continuing staff;

         marketing; or

         investment in new systems and distribution networks.

These expenditures relate to the future conduct of the business and are not

liabilities for restructuring at the end of the reporting period.                         Such

expenditures are recognised on the same basis as if they arose independently of a restructuring.

Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract as defined in paragraph 10.

As required by paragraph 51, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring.


              For each class of provision, an entity shall disclose:

the carrying amount at the beginning and end of the period;

additional provisions made in the period, including increases to

existing provisions;

amounts used (ie incurred and charged against the provision)

during the period;

unused amounts reversed during the period; and

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.

              An entity shall disclose the following for each class of provision:

a brief description of the nature of the obligation and the expected

timing of any resulting outflows of economic benefits;

an indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an entity shall disclose the major assumptions made concerning

future events, as addressed in paragraph 48; and

the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.

              Unless the possibility of any outflow in settlement is remote, an entity

shall disclose for each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent

liability and, where practicable:

an estimate of its financial effect, measured under paragraphs


an indication of the uncertainties relating to the amount or

timing of any outflow; and

the possibility of any reimbursement.

In determining which provisions or contingent liabilities 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 paragraphs 85(a) and (b) and 86(a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts relating to warranties of different products, but it would not be appropriate to treat as a single class amounts relating to normal warranties and amounts that are subject to legal proceedings.

Where a provision and a contingent liability arise from the same set of circumstances, an entity makes the disclosures required by paragraphs 84-86 in a way that shows the link between the provision and the contingent liability.

Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the end of the reporting period, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 36-52.

It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of income arising.

Where any of the information required by paragraphs 86 and 89 is not

disclosed because it is not practicable to do so, that fact shall be stated.

In extremely rare cases, disclosure of some or all of the information required by paragraphs 84-89 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.

Transitional provisions

The effect of adopting this Standard on its effective date (or earlier) shall be reported as an adjustment to the opening balance of retained earnings for the period in which the Standard is first adopted. Entities are encouraged, but not required, to adjust the opening balance of retained earnings for the earliest period presented and to restate comparative information. If comparative information is not restated, this fact shall be disclosed.


Effective date

This Standard becomes operative for annual financial statements covering periods beginning on or after 1 July 1999. Earlier application is encouraged. If an entity applies this Standard for periods beginning before 1 July 1999, it shall disclose that fact.


IFRS 9, as amended in November 2013, amended paragraph 2 and deleted paragraph 97. An entity shall apply those amendments when it applies IFRS 9 as amended in November 2013.

Annual Improvements to IFRSs 2010-2012 Cycle, issued in December 2013, amended paragraph 5 as a consequential amendment derived from the amendment to IFRS 3. An entity shall apply that amendment prospectively to business combinations to which the amendment to IFRS 3 applies.

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