Provisions and financial liabilities
Councils need to consider the need for additional provisions based on changes in operations, for example:
- Onerous contract provisions for service contracts which are still in place even though the facilities have closed
- rehabilitation/makegood provisions where decisions have been made to cease operations at certain sites or leases that are being ended early.
AASB 137 Provisions, Contingent Liabilities and Contingent Assets (AASB 137) contains requirements to recognise liabilities for onerous contracts. An onerous contract is defined 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.’ [AASB 137.10]
At the point in time a contract becomes onerous, a provision must be recognised as a liability for the net unavoidable costs of exiting the contract. For non-cancellable contracts this will be the cost of fulfilling the contract, or any penalties, if lower.
Where the impact of Covid-19 results in increased costs to meet, or reduced benefits from, an executory contract, management need to assess whether the contract has become onerous and a provision is recognised.
If council can no longer fulfil their obligations under a grant agreement, they are to consider whether any financial liability is recorded at the reporting date.
The accounting treatment at 30 June 2020 depends on the initial treatment of the grant:
- If the grant was within the scope of AASB 1058, the revenue would have been recognised on receipt. Until a liability to repay the funds crystallises, there will be no change – at the date the council is notified they have a liability, an expense would be charged to the Income Statement.
- If the grant was within the scope of AASB 15, the revenue is not recognised until the performance obligations are met and therefore there would be no reversal of revenue. If council is notified that a liability has crystallised, the accounting journal would be to transfer an amount from the contract liability (income received in advance) to a financial liability, such as a payable.
Last updated: Monday, Nov 30, 2020