Accountants Accounting and Reporting Policy UK Accounting Standards Standards in issue FRS 12 Provisions, Contingent Liabilities and Contingent Assets

FRS 12 Provisions, Contingent Liabilities and Contingent Assets

FRS 12 (September 1998) (PDF)

FRS 12 was effective for accounting periods ending on or after 23 March 1999. It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective. ​

FRS 12's objective is to ensure that a provision (a liability that is of uncertain timing or amount) is recognised only when it actually exists at the balance sheet date. A provision should be recognised therefore only when:

  1. an entity has a present obligation (legal or constructive) as a result of a past event;
  2. it is probable that a transfer of economic benefits will be required to settle the obligation; and
  3. a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

Contingent liabilities and contingent assets are not recognised as liabilities or assets. However, a contingent liability should be disclosed if the possibility of an outflow of economic benefit to settle the obligation is more than remote. A contingent asset should be disclosed if an inflow of economic benefit is probable.

The standard was developed as a joint project with IASC.

Provisions often have a substantial effect on an entity's financial position and performance. Earlier published guidance, however, had tended to concentrate on particular forms of provision rather than the general principles underlying all provisions. Furthermore the practice had grown up of aggregating present liabilities with expected liabilities of future years, including sometimes items related to ongoing operations, in one large provision, often reported as an exceptional item. The effect of such 'big bath' provisions was not only to report excessive liabilities at the outset but also to boost profitability during the subsequent years, when the liabilities were in fact being incurred.