CAPITULO V: Programa de Intervención
5.8 Cronograma
2.2.1 Basics
Provisions are a subset of liabilities. Within the scope of our investigation, we examine the effects on so called other provisions. In line with German GAAP, we define other provisions as provisions except those for taxes and pensions (Jödicke, 2009). Account- ing for other provisions is strongly associated with assumptions and estimations. The magnitude of these assumptions and estimations vary with the degree of uncertainty. The degree of uncertainty is influenced by considerations as whether a firm has a pre- sent obligation and if so, how to estimate the expenditure required to settle the obliga- tion.
2.2.2 Recognition
The rules concerning the recognition of other provisions differ between German GAAP and IFRS. In the course of the next paragraph, we give an overview of the different types of other provisions under the respective accounting regime. For the sake of brev- ity, we do not give a detailed description of the recognition criteria of other provisions.
The relevant paragraph dealing with the recognition of other provisions under German GAAP is para. 249 HGB.2 It offers an exhaustive enumeration of types of other provi-
-103-
sions. These types can be classified into external obligations (towards third parties) and internal obligations. Provisions concerning external obligations comprise provisions for uncertain liabilities and provisions for onerous contracts. This classification also entails provisions for restructuring costs. Provisions concerning internal obligations comprise provisions for maintenance expenses deferred to the next financial year, provisions for land restoration expenses deferred to the next financial year and provisions for other expenses. Provisions for restructuring costs can also feature components of internal ob- ligations.
IAS 37 is the core standard that deals with other provisions under IFRS. However, cir- cumstances that fall into the scope of other standards might also lead to the recognition of other provisions (IAS 37.5; Torklus, 2007). Under IFRS, recognition of provisions for external obligations (provisions for uncertain liabilities, onerous contracts and re- structuring costs) are mandatory. Table 1 summarizes the recognition of other provi- sions under German GAAP and IFRS.
Table 1: Recognition of other provisions under German GAAP and IFRS
Type of other provisiona German
GAAP IFRS
External obligations
Provision for uncertain liabilities mandatory mandatory Provision for onerous contracts mandatory mandatory
Provision for restructuring costsb mandatory mandatory
Internal obligations
Provision for maintenance expenses deferred to the first three months of
next financial year mandatory forbidden
Provision for maintenance expenses deferred to a period after the first
three months of next financial year optional forbidden Provision for land restoration expenses deferred to the next financial year mandatory forbidden
Provision for other expenses optional forbidden
Notes:
a The different types of other provisions follow the terminology used in HGB para. 249 and IAS 37. b Provisions for restructuring costs can feature components of external and internal obligations.
-104- 2.2.3 Measurement
Para. 253 sect. 1 sent. 2 HGB (prior to the German Accounting Law Modernization Act) deals with the measurement of other provisions under German GAAP. Other provisions are recognized with the value that emerges after reasonable management judgment. Ba- sically, single obligations are measured on basis of their most likely outcome plus a prudent component. In the case of a continuous range of possible outcomes where each point of that range is as likely as any other, the provision must be recognized with the highest value (Rüdinger, 2004). Large populations of similar obligations (e.g. product warranties) are measured using the expected value method plus a prudent component. Only in cases where the underlying obligation features an interest component, the obli- gation has to be discounted regardless from the effect of the time value of money. Ex- pected increases in prices and costs are not allowed to be taken into account according to a BFH (Federal Fiscal Court - Bundesfinanzhof) decision. However, it is not uncom- mon among firms to take these increases into account if the increases can be reliably anticipated (German Federal Ministry of Justice, 2008). If the expenditure is expected to be reimbursed by a third party and the reimbursement has been legally incurred, the reimbursement needs to be recognized as an asset. A reimbursement that does not fulfill the criteria to be recognized as an asset might affect the book value of the provision if the reimbursement is a virtually certain future claim.
Under IFRS, the core standard IAS 37 also deals with the measurement of provisions. Provisions are measured at the best estimate. In this context, the best estimate is the amount that a firm “would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party” (IAS 37.37). The most likely outcome is regarded to be the best estimate for single obligations. But also other possible outcomes are con-
-105-
sidered if they are mostly higher or mostly lower than the most likely outcome (Fried- erich and Schmidt, 2008). Large populations of similar obligations are measured using the expected value method (Rüdinger, 2004). In cases where the effect of the time value of money is material, the provision needs to be discounted (Torklus, 2007). Expected increases in prices and costs need to be considered, if there is sufficient evidence that they will occur (Förschle, Kroner and Heddäus, 1999). If the expenditure is expected to be reimbursed by a third party and the reimbursement is virtually certain, the reim- bursement needs to be recognized as an asset (IAS 37.53).
Summing up, accounting for provisions is essentially different under German GAAP and IFRS. This applies to recognition criteria as well as to measurement concepts. The German GAAP principles related to provisions are considered to be strongly driven by the prudence principle (Leuz and Wüstemann, 2004; Moxter, 1999). Leeways are exis- tent in both accounting regimes. Overall, most overlap exists with regard to recognition of obligations towards third parties. Differences are perceived not to be essential on this matter. Differences in measurement are more pronounced. Notably, it is forbidden to recognize internal obligations under IFRS (Förschle, Kroner and Heddäus, 1999; Kay- ser, 2002).
2.2.4 Disclosure
Under German GAAP, para. 266 HGB deals with the balance sheet format. Accord- ingly, a separate disclosure of other provisions, provisions for taxes and provisions for pensions between equity (Eigenkapital) and certain liabilities (Verbindlichkeiten) is required. A more detailed differentiation of each provision (and any other balance sheet item) is possible but a separation into current and non-current (other) provisions is not mandatory. Generally, German GAAP does not require to provide more detailed infor-
-106-
mation concerning other provisions in the balance sheet or in the notes. If the firm does not separately disclose other provisions that are material in the balance sheet, para. 285 Nr. 12 HGB requires the firm to provide explanatory information in the notes. This in- formation does not need to be quantitative. Also, information regarding the maturity of other provisions is not mandatory.
Under IFRS, IAS 1 deals with the balance sheet format. Accordingly, the balance sheet has to include a separate line item presenting provisions. This item does not include tax provisions since these are included in the tax liabilities. While tax provisions are re- quired to be included in the line item tax liabilities, provisions for pensions can be sub- sumed under the line item provisions. If this is the case, the item other provisions can be derived by disclosure provided in the notes relating to IAS 19 (Employee Benefits). Generally, a more detailed differentiation of each provision (and any other balance sheet item) is possible or might even be necessary in cases where it is relevant to an under- standing of the firm’s financial position (IAS 1.55). In the notes, IAS 37 requires to pre- sent detailed quantitative and qualitative information for each class of provision. Ac- cording to IAS 37.84, the quantitative information comprise: (1) the carrying amount at the beginning and end of the financial period, (2) additional provisions made in the fi- nancial period including increases to existing provisions, (3) amounts used during the financial period, (4) unused amounts reversed during the financial period, (5) increase during the financial period in the discounted amount arising from the passage of time and the effect of any change in the discount rate. A firm does not need to disclose in- formation regarding the amount by which a provision was underfunded. According to IAS 37.85, the qualitative information comprise: (1) a brief description of the nature and the expected timing of any resulting outflows, (2) an indication of the uncertainties about the amount or timing of those outflows, (3) the amount of any expected reim-
-107-
bursement plus information regarding an asset that has been recognized for that ex- pected reimbursement.
IAS 37.11 distinguishes between provisions and accruals. Accruals are liabilities recog- nized for received goods or services for which no consideration has been given, in- voiced or formally agreed upon. Consequently, accruals need to be reported separately from other provisions. German GAAP does not explicitly address accruals. Similar mat- ters are often treated as other provisions (Förschle, Kroner and Heddäus, 1999).