What are contingent assets?

A contingent asset is a possible asset that may arise because of a gain that is contingent on future events that are not under an entity’s control. According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable.

A contingent asset becomes a realized (and therefore recordable) asset when the realization of income associated with it is virtually certain. In this case, recognize the asset in the period when the change occurs. This treatment of a contingent asset is not consistent with the treatment of a contingent liability, which should be recorded when it is probable (thereby preserving the conservative nature of the financial statements).

The best example of both sides of a contingent asset and contingent liability is a lawsuit. Even if it is probable that the plaintiff will win the case and receive a monetary award, it cannot recognize the contingent asset until such time as the lawsuit has been settled. Conversely, the other party that is probably going to lose the lawsuit must record a provision for the contingent liability as soon as the loss becomes probable, and should not wait until the lawsuit has been settled to do so. Thus, recognition of the contingent liability comes before recognition of the contingent asset.

Provisions and contigent liabilities

A provision shall be recognised when: (a) an entity has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognised.

An entity shall not recognise a contingent liability.

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Leasehold makegood and restoration provisions

Lease makegood / leasehold restoration provisions should be recognised in relation to properties held under operating leases. Such a provision may arise because many property leases contain clauses under which the lessee has to make good dilapidations or other damage which occurs to the property during the course of the lease or restore a property to a specified condition.

Overview

Under IAS 37.14, a provision shall be recognised when:

  • “An entity has a present obligation (legal or constructive) as a result of a past event;
  • It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
  • A reliable estimate can be made of the amount of the obligation.”

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Corporate taxes

Also called income taxes, but than for corporates. Here we go…………  Just a reminder …… Two things in life are certain: …… DEATH……. and ……..TAXES

What is it about?

IAS 12 Income taxes prescribes the accounting treatment for income taxes being the accounting for the current and future tax consequences of:

  • the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position, and
  • transactions and other events of the current period that are recognised in an entity’s financial report.

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What is a correct discount rate in pension calculations?

Some background information on the discussion on pension plans and discount rates. Choosing the correct discount rate in calculation pension liabilities is not an easy task and a task that brings public responsibility.

Interest rates in the European area are close to zero because the ECB holds its benchmark refinancing rate at zero since March 2016, see table below:

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Sponsor Accounting for a Pension Asset

A pension asset arises when total contributions by the sponsor of a defined-benefit plan (plus interest income) are greater than all pension expense since the plan’s inception.

For example, a pension plan fund had a net pension asset of $9.312 billion before considering any valuation allowance.

As with any recorded asset (think of accounts receivable, or a building), a pension asset signals that the sponsor can benefit from the asset in the future. However, unlike other types of assets, a sponsor does not own the plan assets in a pension plan. This unique accounting situation requires a sponsor to consider whether and when it can benefit from the surplus assets in a pension plan. Continue Reading “Sponsor Accounting for a Pension Asset

Determining annual pension expense

In general terms, pension expense reported in the statement of profit or loss is driven by how much the pension liability increased during the year, net of returns on the plan’s assets. Normally, a pension liability increases as employees earn additional future benefits from an additional year of service, and as they get closer to collecting retirement benefits. These factors also increase the pension expense in the statement of profit or loss.

Plan assets increase with returns that the plan earns on its investments, reducing the pension expense reported in the statement of profit or loss. Continue Reading “Determining annual pension expense”

Components of a company’s pension liability

A company’s defined-benefit pension plans have three basic components:

    • accrued-benefit obligations, or the future liabilities created by employees’ service;
    • plan assets, used to pay pension benefits; and
    • unamortized actuarial gains and losses.

Setting aside unamortized actuarial gains and losses, when plan assets are less than the accrued benefit obligation, a net pension liability is recorded on the statement of financial position. A net pension liability is the estimate of the amount needed to pay for pension benefits that have been earned by current and past employees, less the pool of assets set aside in a separate legal entity to eventually pay for the benefits. Continue Reading “Components of a company’s pension liability”

Impact of the Discount Rate on Pension obligations

In order to understand how the discount rate impacts the company’s pension obligations, it is useful to first understand the finance concepts of time value of money and present value. Note that the discount rate is the most important (and most difficult to assess) assumption in calculating pension obligations.

Time Value of Money

The concept of time value of money is best explained in a simple way: a dollar today is worth more than a dollar in the future.

Imagine receiving $1,000 today and putting it in a simple bank savings account. That $1,000 will eventually grow over the years because the bank will pay interest on it. Thus, there is a greater benefit to getting the $1,000 now rather than later. If the amount is to be received later, it would be necessary to ask for more than $1,000 to compensate for the interest that could have been earned had the money been received today. Continue Reading “Impact of the Discount Rate on Pension obligations”

Key assumptions/Disclosures to be made in a Pension plan

There are two types of pension assumptions that a sponsor makes with input from their actuaries:

  • Economic assumptions describe how market forces affect the amount of expected future benefits to be paid to plan recipients.
  • Demographic assumptions describe the impact of plan-participant behaviours on the timing and probabilities of benefits being paid to them.

In (consolidated) financial statements the following key actuarial assumptions that the company/ sponsor used to estimate its portion of benefit obligation and pension expense under the pension plan. Continue Reading “Key assumptions/Disclosures to be made in a Pension plan”