In accordance with the "Basic Standards for Enterprise Accounting," the Ministry of Finance issued Accounting Standard No. 13 for Enterprises — Contingencies on 2006/2/15, effective as of 2007/1/1.
1. Overview of Guidelines
Contingencies are uncertain matters arising from past transactions or events, the outcome of which depends on whether one or more future events occur or do not occur.
Common or contingent matters
- Pending Litigation
- • Pending Arbitration
- • Product Quality Guarantee
- • Environmental Pollution Remediation
- • Loss-making contracts
- • Restructuring obligations
II. Recognition and Measurement of Provisions
A provision shall be recognized when the following conditions are met:
Confirm Conditions
- This obligation is a present obligation assumed by the enterprise.
- It is probable that fulfilling this obligation will result in an outflow of economic benefits from the enterprise.
- The amount of the obligation can be reliably measured.
Determination of Best Estimate
- • If the required expenditure falls within a continuous range and all outcomes within that range are equally likely, determine the amount as the midpoint of the range.
- • For individual projects, determine based on the most probable amount.
- • For multiple projects, determine based on possible outcomes and their respective probabilities.
III. Loss Contracts
If a contract that was expected to be profitable becomes loss-making, and the obligations arising from this loss meet the criteria for recognition of a provision, such provisions shall be recognized.
Contracts Pending Execution
Refers to a contract where the parties have not yet performed any contractual obligations, or have only partially performed equivalent obligations.
Loss-making contract
A contract for which the unavoidable costs of fulfilling obligations exceed the expected economic benefits.
Note: Enterprises should not recognize a provision for future operating losses.
IV. Restructuring Obligations
An enterprise shall recognize a provision for restructuring obligations when the criteria for recognition of provisions are met. The existence of any of the following circumstances indicates that the enterprise has incurred a restructuring obligation:
- • A detailed and formal restructuring plan
- • The restructuring plan has been publicly announced.
Determination of Provision Amount
An enterprise shall measure the provision for restructuring based on direct expenditures directly related to the restructuring. Direct expenditures do not include costs such as retraining retained employees, marketing activities, or investments in new systems and marketing networks.
V. Contingent Liabilities and Contingent Assets
Contingent Liabilities
A potential obligation arising from past transactions or events whose existence depends on the occurrence or non-occurrence of one or more uncertain future events; or a present obligation arising from past transactions or events where it is not probable that an outflow of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be measured reliably.
or assets
Potential assets arising from past transactions or events may only be confirmed by the occurrence or non-occurrence of future uncertain events.
Key Principles
Entities shall not recognize contingent liabilities or contingent assets.
Regulatory Document Attachment
Accounting Standards for Business Enterprises No. 13 — Contingencies (PDF)