Pulling the plug on the big bath scam: FRS 12 aims to clean up accounting provisions

Article Abstract:

The UK Accounting Standards Board's Financial Reporting Standard (FRS) No 12, 'Provisions, Contingent Liabilities and Contingent Assets,' plays a crucial role in the development of a financial reporting framework where an entity's financial statements reflect only items considered as assets, liabilities or assets less liabilities (equity). FRS 12 subscribes to the principles of Financial Reporting Exposure Draft No 14, 'Provisions and Contingencies' and agrees with the discussion paper published earlier. Its implementation is expected to bring significant changes, such as the scrapping of the so-called 'big bath' provisions, where firms incorporate future expenses and losses into a provision, have it recognized based on prudence, and then charge whatever expenses or losses that occur against the earlier provision instead of the profit and loss account of the period during which they were incurred.

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International Accounting Standards IAS 37: Provisions, Contingent Liabilities and Contingent Assets

Article Abstract:

The International Accounting Standards Committee's International Accounting Standard (IAS) No 37, 'Provisions, Contingent Liabilities and Contingent Assets,' provides guidance on the application of the appropriate recognition criteria and measurement bases to provisions, contingent liabilities and contingent assets. The new standard also seeks to ensure the disclosure of information on their nature, timing and amount in the notes to the financial statements. IAS 37 applies to all companies, except for provisions, contingent liabilities and contingent assets arising from executory contracts, financial instruments that are carried at fair value, or contracts with policyholders in the case of insurance companies. Also exempt are provisions, contingent liabilities and contingent assets covered by International Accounting Standard.

International Accounting Standards Board

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Financial Reporting Standard 12: Provisions, Contingent Liabilities and Contingent Assets

Article Abstract:

The UK Accounting Standards Board's Financial Reporting Standard (FRS) No 12, 'Provisions, Contingent Liabilities and Contingent Assets' presents accounting principles for provisions, contingent liabilities and contingent assets to ensure that the proper recognition criteria and measurement bases are applied. The standard also requires the disclosure of relevant information in the notes to the financial statements that would clarify to the reports' users the nature, timing and amount of the provisions and contingent assets and liabilities. FRS 12 takes effect for all financial statements seeking to provide a true and fair view in reporting provisions, contingent liabilities and contingent assets. Conditions under which the standard does not apply are discussed.

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