The Institute of Chartered Accountants of Sri Lanka (ICASL) has issued Sri Lanka Accounting Standard (SLAS) 36 — Provisions, Contingent Liabilities and Contingent Assets, says a press release. This is the first ICASL standard on provisions liabilities of uncertain timing or amount, based on the corresponding International Accounting Standard No. 37. The Standard requires that: Provisions should be recognised in the balance sheet, when, and only when an enterprise has a present obligation (legal or constructive) as a result of a past event, it is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and reliable estimate can be made of the amount of the obligation.

Provisions should be measured in the balance sheet at the best estimate of the expenditure required to settle the present obligation at the balance sheet date, in other words, the amount that an enterprise would rationally pay to settle the obligation, or to transfer it to a third party, at that date. For this purpose, the enterprise should take risks and uncertainties into account. However, uncertainty doesn’t justify the creation of excessive provisions or a deliberate overstatement of liabilities. An enterprise should discount a provisions where the effect of the time value of money is material and should take future events, such as changes in the law and technological changes into account where there is sufficient objective evidence that they will account.

The amount of a provision should not be reduced by gains from the expected disposal of assets (even if the expected disposal is closely linked to the event giving rise to the provision) nor by expected reimbursements (for example, through insurance contracts indemnity clauses or suppliers’ warranties). When it is virtually certain that reimbursement will be received if the enterprise settles the obligation, the reimbursement should be recognised as a separate asset; and a provision should be used only for expenditures for which the provision was originally recognised, and should be reversed if an outflow of resources is no longer probable.

The Standards sets out three specific applications of these general requirements: A provision should not be recognised for future operating losses and a provision should be recognised for an onerous contract — a contract in which the unavoidable costs of meeting the obligations under the contract exceed the expected economic benefits, and a provision for restructuring costs should be recognised only when an enterprise has a detailed formal plan for the restructuring 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 — for this purpose, a management or board decision is not enough.

A restructuring provision should exclude costs — such as retraining or relocating continuing staff, marketing or investment in new systems and distribution networks — that are not necessarily entailed by the restructuring or that are not associated with the enterprise’s ongoing activities.

SLAS 36 replaces part of SLAS 12, Contingencies and Events Occurring After the Balance Sheet Date. SLAS 36 prohibits the recognition of contingent liabilities and contingent assets. An enterprise should disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote, and disclose a contingent asset, if an inflow of economic benefits is probable.

Commanding on the Standard, Reyaz Mihular, the Chairman of the Statutory Accounting Standard Committee said, "We have seen many abuses of provisions and SLAS 36 will stop these".

This Standard mandatorily applies to all "Specified Business Enterprises" coming under the purview of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995. Non-specified business enterprises are also encouraged to apply the standard in the preparation of financial statements.

‘This SLAS becomes operative for annual financial statements covering periods beginning on or after January 1. Earlier application is encouraged.

The ICASL Council has adopted the Standard in accordance with Section 2 (1) of Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, based on the recommendation of the Statutory Accounting Standards Committee set up under Section 8(1) of the same Act. In accordance with the Section 4(1) of the said Act, the Standard has been published in the gazette extraordinary of February 1, 1169/26 in all three languages.