Which of the following general ledger accounts would likely not be impacted in a conversion process?

1         Objective

The objective of this chapter is to give an overview of the accounting lifecycle of provisions recognition as well as contingent liabilities and contingent assets note disclosure requirements. It details how an end user, based on the involved Umoja user profiles, should perform roles and responsibilities related to IPSAS-compliant accounting and reporting of provisions, contingent liabilities and contingent assets, and Events after the Reporting Date.

No specific module exists in Umoja for the processing of provisions contingent liabilities, contingent assets and Events after the Reporting Date. The processing of transactions for these items is a year-end process, with entries made directly in Umoja using manual journal vouchers (JVs).

2         Summary of IPSAS Accounting Policy

2.1            Provisions, Contingent Liabilities and Assets

The classification of liabilities between provisions, accruals and payables depends on the degree of certainty of the timing or amount of the future outflow of resources to settle the obligation. While it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions:

Diagram - Progression from contingent liabilities to payables

The term contingent liability is used for liabilities where there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. Such a distinction is very important as contingent liabilities are not recognized as liabilities in the statement of financial position, but disclosed in the notes to the financial statements.

Contingent assets are not recognized in the Statement of Financial Position, but are instead disclosed in the notes to the financial statements.

2.1.1        Recognition

The UN should recognize a provision when all of the following three key criteria have been met, and the indicative threshold of USD 10,000 (i.e. potential outflow is estimated at USD 10,000 and more per individual item) is met:

a)            The UN 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 or service potential will be required to settle the obligation; and

c)            A reliable estimate can be made of the amount of the obligation.

Obligations may be either legal or constructive in nature, as defined in section 5.1 of the Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets.

In order for a provision to be recognized, the outflow of resources should be probable. Whilst IPSAS does not specify a precise numerical threshold, this is generally accepted as having a probability of greater than 50% of occurring. Should the probability of the outflow be possible, a contingent liability should be disclosed in the notes to the financial statements by the UN (but not recognized in the statement of financial position). If the probability is considered remote (i.e. highly unlikely), no entries or disclosures should be made.

In most cases, the UN should be able to determine a range of possible values and thus form a reliable estimate. The use of accounting estimates to determine the value of the obligation is permitted and encouraged where precise values are not available.

Note: Circumstances may change so that a contingent liability may meet the recognition criteria for provisions in later periods. Fresh consideration of the recognition criteria should therefore be performed at the end of each reporting period.

Summary of recognition of provisions and contingent liabilities

For accounting policies relating to specific types of provisions, please refer to section 10 of the Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets.

2.1.2        Measurement

Measurement should be based upon the best estimate the UN can make, taking into account the risks and uncertainties of the outflow and the effect of the time value of money (for long-term provisions), in addition to consideration of future events which may influence measurement of a provision.

United Nations staff should use their judgement in determining their own capacity to form a best estimate given their experience, and consult experts where appropriate. Experts should only be consulted where the UN does not have the in-house capacity to obtain a best estimate.

For large populations of similar obligations, a weighted outcome should be used. Should there be a continuous range of values of equal possibility, the mid-point should be used.

For single obligations, there may be several possible outcomes. Whilst the individually most likely outcome may also often form the best estimate, other outcomes should also be considered as these may also impact the overall measurement of the provision.

Certain outcomes relating to a provision or contingent assets may represent very high or low potential outflow or inflow for the UN. It is therefore important to carefully assess the circumstances that may give rise to provision recognition or contingent asset disclosure to avoid excessive or exaggerated recognition of provisions in the financial statements.

Provisions should be discounted to the present value of the outflows required to settle the obligation where the effect of the time value of money is material. The discount rate will be based on the opportunity cost which is the rate of return that could have been earned from investments held in Cash Pools. This will be provided by UN Treasury every 6 months.

Note: discounting is not often applied in practice mainly due to the uncertainty regarding timing and amount of cash flows.

Any proceeds anticipated from the disposal of assets to be used in settlement of the obligations should not be taken into account when measuring a provision.

2.1.3        Adjusting, Utilizing and Reversing of Provisions

As circumstances surrounding provisions and contingent liabilities rarely remain the same over the course of time, provisions and contingent liabilities should be reviewed at the end of each financial year, to ensure that the initial recognition and measurement is still appropriate.

Provisions may be 'utilized' in the financial year, meaning that part of the obligation may be settled in the financial year. This will reduce the value of the provision at the end of the financial year, although the remaining portion of the obligation may change in value depending on events. Only relevant expenditure should be offset against a provision (i.e. only those costs for which the provision was originally intended can result in the 'utilization' of the provision).

Where a provision is no longer required (i.e. where the provision recognition criteria are no longer met), it should be reversed. A provision can be fully or partially reversed depending on the specific circumstances.

2.2            Events after the Reporting Date

Adjusting events

Adjusting events after the reporting date are those that provide additional evidence of conditions that existed at the reporting date.

Where a material adjusting event is identified, the amounts in the financial statements for the reporting period should be adjusted to reflect the adjusting event. Adjusting events are therefore recognized in the financial statements in line with the IPSAS guidance applicable to the issue.

Non-adjusting events

Non-adjusting events after the reporting date are those that are indicative of conditions that arose after the reporting date.

Where a material non-adjusting event is identified, the amounts in the financial statements for the reporting should not be adjusted to reflect the event. Material non-adjusting events are instead disclosed in the notes to the financial statements.

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2.3            Reference

For further information on accounting policies relating to the above topics, refer to:

·               Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets;

·               Corporate Guidance on Events After the Reporting Date;

·               The IPSAS Policy Framework.

3         Desktop Procedures

As noted above, accounting for provisions within Umoja is typically a manual process comprising the following key stages:

The sections below describe in detail the procedures required to enter these transactions into Umoja, using the example of a legal case handled by the OLA to illustrate the accounting entries required.

3.1            Provisions

3.1.1        Recognizing a Provision

Recognition is the point at which a provision is recorded in the financial statements and hence when it is entered into Umoja. The diagram below shows the overall process needed to recognize a provision in Umoja:

A provision should be recognized when the recognition criteria in section 2.1.1 above are met.

The following diagram shows the detailed data flow required to recognize a provision:

*Note: In some cases, the probability of outflows may be remote and no accounting entries or disclosures will be necessary.

For the purpose of this diagram, it is assumed that the process is centrally coordinated, but this approach may vary in practice. Offices/Missions fill out an excel spreadsheet and submit to Accounts Division as part of their year-end financial statements packages. Submissions are centrally reviewed to ensure that information provided is accurate and cases are appropriately accounted for in the financial statements (e.g. see template described in section 5.1 below).

A.      Information request:

A.1.      Given that events leading to the recognition of a provision are likely to be managed by teams outside of the Accounts Division, it is vital that the Accounts Division requests information on pending cases that may need to be reported from the relevant operational teams. These requests are generally included in the year-end instructions; however, relevant teams / offices should be aware that recognition of provisions may occur at any stage of the financial year.

A.2.      Whilst it is likely that the Accounts Division will perform the assessment to determine appropriate accounting treatment, the information provided by the relevant teams should contain details of all the key factors from which the Accounts Division will make its assessment.

A.3.      The graphic in section 6 maps out the various stakeholder offices involved in the UN's claim management process. For more information as to how the cases are processed, please refer to graphic in section 6:

A.4.      It is therefore critical that information request templates from the Accounts Division are designed appropriately to include the data fields necessary to perform the accounting assessment, and that the requests are issued by (and returned to) the Accounts Division in a timely manner at year-end.

A.5.      Templates may need to be tailored depending on the nature of the past events and obligations in question. As there is currently no module within Umoja to facilitate the provisions reporting process, MS Excel spreadsheets and Word documents should be used to record the necessary information.

A.6.      Key information to include in this request includes:

A.6.1.      Brief description and date of 'past event' / case in question;

A.6.2.      Details of any legal or constructive obligation;

A.6.3.      Assessment of probability of outflow of economic benefits or service potential;

A.6.4.      Measurement (i.e. valuation) of outflow based on measurement criteria in section 2.1.2 above;

A.6.5.      The UN claim/reference number and/or references to relevant database (if applicable);

A.6.6.      Supporting documents available for audit trail purposes (and also for Accounts Division review); and

A.6.7.      Details for any payments and adjustments during the reporting period (if available).

Note: the information submitted should include all open events and cases (i.e. including those recognized as provisions or contingent liabilities in the previous reporting period). The current year information response would ideally be based on the prior year response, which therefore includes all items from the prior year. This allows preparers to update each case with the current year status, for example, case settled and paid, withdrawn, increased probability.

A.7.      An example of an information request template for legal claims is included in section 5 below.

A.8.      Details of contingent liabilities are also included in this template as such events may vary between provision and contingent liability depending of the uncertainty of the potential outflow.

B.      Identification and measurement

B.1.      Identification

B.1.1.      Teams receiving the information request from the Accounts Division should examine all areas of their activities which may give rise to a provision. These will typically include those activities specified in section A.3 above.

B.1.2.      All cases or events that meet the recognition criteria and contingent liabilities disclosure requirements in section 2.1.1 above and meet the indicative threshold of USD 10,000 (per individual case) should be included in the summary.

B.1.3.      In some instances, it may be unclear whether a legal or constructive obligation exists, or whether an outflow of resources embodying service potential or economic benefits is probable:

B.1.3.1.            Where cases require legal interpretation, the OLA should be consulted.

B.1.3.2.            For other events, professional judgement should be used by responsible team. Past practice and outcomes can also be taken into consideration when assessing cases.

Note: it is essential that these criteria are reviewed at the end of each financial year as facts and circumstances for each case may have changed during the financial year.

B.1.4.      Records and evidence of this assessment should be retained by responsible team to provide audit evidence and assist the Accounts Division as necessary.

Detailed examples on recognition of provisions are included in Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets.

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B.2.      Measurement

B.2.1.      The next step would be to estimate the potential outflow based on the criteria described in section 2.1.2 above.

B.2.2.      In some instances, the value of the potential outflow may be unclear, for example:

B.2.2.1.            Cases may require legal interpretation - please consult OLA

B.2.2.2.            Lack of information about particular cases- teams should use professional judgement which may involve considering past outcomes, and other circumstances surrounding cases at hand.

B.2.3.      Teams should also at this stage calculate the allocation between current and non-current portions of the provision. The current portion represents those payments which will be made within 12 months of the reporting date.

Note: it is essential that measurement is reviewed at the end of each financial year for each case as facts and circumstances may have changed during financial year.

Detailed examples regarding the measurement of provisions are included in Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets.

C.      Review of responses

C.1.      The Accounts Division should ensure the timely collection of all responses to the information request to enable the appropriate level of review prior to the preparation of the financial statements.

C.2.      The Accounts Division should review submissions received from each reporting team to ensure that they are complete and contain all the information requested. If necessary, the Accounts Division should liaise with the OLA and other specialists where the measurement, assessment of obligations, and the probability of outflow are not clear.

C.3.      Responses should be reviewed together with a global overview of the nature and value of all provisions proposed by the relevant teams. This will allow the Accounts Division to group provisions by their nature, and understand the value of individual items in the context of overall audit materiality.

C.4.      At this point, the Accounts Division should also review for duplicated cases (i.e. where information on the same cases has been submitted more than once by different teams).

D.     Accounting assessment

D.1.     Building on the review of responses in section C above, it is vital that the Accounts Division is able to conclude on the final accounting treatment for the items raised.

D.2.     Working papers should be retained which show the collective summary of the detailed assessments performed by local teams, as these will support the final accounting entries and/or disclosures made. These records should name the contact officers / team leaders in case further follow-up is required.

D.3.     Such accounting assessment should include consideration of:

D.3.1.     Whether recognition criteria for provisions have been met;

D.3.2.     Whether appropriate measurement of provisions has been undertaken;

D.3.3.     Materiality in the context of the overall financial statements; and

D.3.4.     Whether the correct split of payments between current and non-current portions has been made.

E.      Entry in Umoja

E.1.      Once the criteria for provision recognition have been met, and appropriate measurement established, the provision may then be entered into Umoja.

E.2.      It is likely that working papers supporting the Umoja entries will be maintained manually in MS excel as there is no specific provisions module in Umoja. Prior to entry in Umoja it is therefore critical that the excel sheet is checked thoroughly as system controls will be limited.

E.3.      Entry of provisions in Umoja is done through raising a manual Journal Voucher (JV) (T-code: FV50 for non-reversing entries and FBS1 for reversing entries) which can be referred to from section 3.2 of the General Ledger Chapter.

E.4.      As reversing manual JVs are used to make the Umoja entry, the Accounts Division should first check that provisions recognized in previous reporting periods have been reversed during the current reporting period.

Note: Contingent liabilities and contingent assets are not recognized in Umoja but are instead disclosed in the notes to the financial statements only. For further guidance regarding contingent liabilities and contingent assets please see sections 3.2 and 3.3 below.

E.5.      The general accounting entry to recognize provisions (except provisions for dismantling) is:

Note: The Credit account depends on the nature of the provision and the expected future transaction date. For example, if the settlement of a claim is within 10 months of the reporting date, the Credit will be to the Provisions: Current GL account.

E.6.      Depending on the nature of the provision, the JV may debit an asset account (as opposed to an expense account). This would be the case for a provision for dismantling a temporary building and restoring the site to its original condition if indicative threshold of USD 10,000.00 is met.

E.7.      The following accounting entry should be made specifically for restoration costs provisions:

Note: The debit entry here is posted to an asset subaccount. On the liability side of the entry, it is assumed that the dismantling will occur in more than one financial year and thus the provision is recognized as non-current liability in the financial position. This is entered via a non-reversing JV (T-code: F-90).

The GL account would be automatically derived based on the asset class of the asset subaccount. e.g. for Prefab, the asset class is 135 and the corresponding GL account is 27143050. A separate element of the building's Asset Master Record would be created in the FI-AA (Asset Accounting) sub-module of the FA sub-ledger. For details on asset master data creation and transaction processing, refer to sections 3.4 and 4.1 of Chapter on Property, Plant and Equipment.

E.8.      Provisions should be posted to the following GL codes:

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E.9.      Detailed guidance on the raising of manual JVs (T-code: FV50 for non-reversing entries and FBS1 for reversing entries) and reversing JVs can be found in section 3.2 of the General Ledger Chapter.

Approvals for raising a provision within Umoja are the same as those for raising manual JVs. Provisions are usually recognized at the end of each reporting period and will be raised through reversing journal vouchers. This means that the journals will be automatically reversed at the start of the next reporting period.

It is therefore critical that the full value of provisions is recognized at the end of each period, and not just the movement in the reporting period.

Example:

The following Umoja entry is raised on 31 December 20X1:

On 1 January 20X2 the following entry will then be made automatically in Umoja to reverse this:

If the measurement of the provision remains unchanged in 20X2, the provision must be raised again at the end of 20X2:

Note: detailed guidance on the process of raising manual and reversing JVs can be found in section 3.2 of the General Ledger Chapter.

3.1.2        Utilizing a Provision

As noted in section 2.1.3 above, utilizing a provision will result in derecognizing the provision as the obligations to which the provision relates are settled, usually through the payment of cash.

Note: only relevant expenditure should be offset against a provision.

There are three key stages to the utilization of a provision:

F.       Identifying payments / Transaction Code: FAGLL03

Where expenditure transactions in relation to a provision are debited to an expenditure GL account (as opposed to being debited directly to a provision GL account such as 39501010 Prov Litigat) Claim, there are two main methods in which to identify the utilization of provisions, which could be used together:

·         Enquiries can be made to the relevant teams through the information request and follow-up discussions.

·         Expense reports can be generated for relevant expense accounts (e.g. legal costs or settlements) to identify any payments or expenses which may relate to open provisions.

F.1.   Enter transaction code FAGLL03 in Command field

F.2.   Select the Enter key to go to G/L Account Line Item Display G/L View screen.

F.3.   Enter the parameters such as the GL account and select All items.

F.4.   Select All items and enter Posting Date range

F.5.   Click the Execute button to display the transactions for a given period

F.6.   Analyze the movement of transactions using Document type and Text field to determine nature of transactions e.g. payments made.

G.     Assessment of suitability

G.1.     Once expenses have been identified, the Accounts Division should ensure that these expenses are relevant to the provision raised.

G.2.     The accounting concept behind this is that the expense should be recognized only once, when the provision is raised and adjusted. If relevant expenses have been charged as an expense when incurred, it is necessary to reverse the expense and instead remove the provision as it is no longer required.

H.     Entry in Umoja

H.1.     During the year the following accounting entries will be processed automatically:

H.1.1.     Reversal of prior-year journal vouchers:

H.1.2.     Recognition of expenses relating to provision:

This is recognized in the system as the expense is incurred (i.e. through SRM or a manual JV (T-code: FV50 for non-reversing entries and FBS1 for reversing entries) as described in the Chapter on Expenses).

H.2.     At the end of the reporting period, the Accounts Division should then make the following accounting entries in Umoja:

H.2.1.     To record the provision in full:

H.2.2.     To report the utilization of the provision, a year end analytical exercise based on the submission from the relevant stakeholders is performed. The exercise intends to identify the actual utilization of provisions (based on payouts made during the year) versus the non-usage or reversal of the previously recorded provisions due to changes in the circumstances since last reporting.

As the real expense for the provision is recorded in previous periods when the provision is raised, the 74XXXXXX account is credited so that in combination with entry H.1.2 above, the net impact on expenses in 20X1 is zero. Instead the provision itself is reduced by the amount paid in the year.

Please refer to section 3.4.5 below for a worked example.

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3.1.3        Reversing a Provision

A provision is reversed, either partially or in full, when it is no longer required. This differs from adjustments to provisions described in section 3.1.4 below, as reversals involve derecognition of all or part of a provision (i.e. they no longer meet the provisions recognition criteria).

On the other hand, adjustments to provisions refer to provisions which still meet the provision recognition criteria, but the estimated value of the potential outflow (i.e. measurement) differs from last reporting period

Reversing provisions follows the same process as the recognition of provisions detailed in section 3.1.1 above, with key focus on measurement of the provisions reported (J) and the entry of changes in measurement into Umoja (L).

I.        Information request

I.1.        The information request issued for the recognition of provisions in section 3.1.1 should include a request for updated information on existing provisions which are no longer required.

I.2.        The Accounts Division can therefore use the recognition of provisions process to gather all of the necessary information relating to the reversal of provisions.

J.        Identification and measurement

J.1.        The request should clearly indicate that the provisions recognition criteria should be assessed for each reported case at the end of each reporting period to determine whether cases still meet the recognition requirements.

K.      Review and accounting assessment

K.1.      The review conducted by the Accounts Division should focus on responses from offices where provisions have been significantly reduced or fully removed from submissions between reporting dates.

K.2.      The accounting assessment is necessary to understand the reasons for these changes, i.e whether:

K.2.1.      These reductions are the result of settlement of cases through payment, which means that the provisions were used, and not reversed (section 3.1.2).

K.2.2.      Reductions are the result of changes in estimate, but where the provision still meets provisions recognition criteria, which will require an adjustment to an established provision, not a reversal (section 3.1.4 below).

K.2.3.      Reductions are due to a case no longer meeting the provisions recognition criteria, which will be a reversal, and the provision for the case in question will be derecognized from the financial statements.

K.3.      This distinction is important for the presentation of the provisions in the note to the financial statements.

L.       Entry in Umoja:

L.1.       The general accounting entry to reverse a provision is:

Note: All provision accruals are automatically reversed at the start of each reporting period. The entry described above is therefore not required if the provision has already been reversed at the start of the year.

3.1.4        Adjusting a Provision

Adjustments to provisions are made when the value of the potential outflow of a provision changes from one year to the next due to changes in accounting estimates. These differ from the 'utilization' of a provision as no cash is paid for adjustments to provisions.

For example, an adjustment may be required when the estimated cost to settle a legal case changes from USD 10 million at the end of one reporting period to USD 12 million at the end of the next reporting period. The provision in the second reporting period would need to be increased (i.e. adjusted) by USD 2 million to reflect the change in estimate.

Adjusting provisions follows the same process as the recognition of provisions detailed in section 3.1.1 above, with key focus on measurement of the provisions reported (N), and the entry of changes in measurement into Umoja (P).

M.   Information request

M.1.   The information request issued for the recognition of provisions in section 3.1.1 should include a request for updated information on existing provisions.

M.2.   In practice, for each reporting year's recognition of provisions process, financial statements preparers would use a copy of the prior year Excel file as a starting document which brings forward the prior year provisions to allow them to assess the current status of these prior year provisions (e.g. no change, withdrawn, settled, adjustment (increase / decrease) or non-current to current reclassification).

M.3.   The Accounts Division can therefore use the recognition of provisions process to gather all of the necessary information relating to the adjustment of provisions.

N.     Identification and measurement

N.1.     The request should clearly indicate that the measurement of the provision should be considered at the end of each reporting period in order to recognize any changes in the measurement of the provision between reporting periods.

O.     Review and accounting assessment

O.1.     The review conducted by the Accounts Division should include a comparison between prior and current year measurement.

O.2.     Provisions that do not change year-on-year may indicate that a new assessment has not been performed by the office in question at the end of each reporting period.

P.      Entry in Umoja:

P.1.      Entry of adjustments provisions in Umoja is done through raising a manual Journal Voucher (JV) (T-code: FV50 for non-reversing entries and FBS1 for reversing entries) in the same manner as recognizing provisions as detailed in section E above.

P.2.      During the year the following accounting entries will have been processed automatically for provisions raised in previous reporting periods:

Reversal of prior-year journal vouchers:

P.3.      At the end of the reporting period, the Accounts Division should then record the accounting entries in Umoja to reflect the revised value of the provision following the adjustment:

3.1.5        Discounting and Unwinding Provisions

Discounting and the unwinding of discounts are accounting concepts that do not impact the actual cash payments to be made in the settlement of provisions, but instead reflect the time value of money.

Q.     Discounting

Q.1.     Cash flows should only be discounted to their net present value when the impact is material. In practice, the Accounts Division may need to calculate the discounted cash flows in order to determine whether or not the impact is material.

Q.2.     Discounting should be performed at initial recognition of a provision as described in section 3.1.1 above.

Further details regarding the calculation of net present values can be found in Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets.

R.      Unwinding of discounted provisions

R.1.      If a provision is discounted upon initial recognition, the discount must be 'unwound' at the end of each subsequent reporting period.

R.2.      The unwinding of a discounted provision is recognized as an interest expense (debit) and an increase in the value of the provision (credit) through a manual JV (T-code: FV50 for non-reversing entries and FBS1 for reversing entries).

R.3.      The effective journal entry for the unwinding of a discounted provision is:

Further details regarding the calculation of the unwinding of discounted provisions can be found in Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets.

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3.2            Contingent Liabilities

Information collected and analyzed for contingent liabilities is obtained through the same process described for provisions in section 3.1.1 above. The final stage of the process does, however, differ as there is no Umoja accounting entry for contingent liabilities - instead they are disclosed in the notes to the financial statements:

S.       Accounting disclosure:

S.1.       No entries are made in Umoja to record contingent liabilities.

S.2.       The Accounts Division should instead maintain an excel sheet containing the key details regarding each significant contingent liability requiring disclosure.

Further details regarding accounting for contingent liabilities can be found in Corporate Guidance on Provisions, Contingent Liabilities and Contingent Assets, including disclosure requirements

3.3            Contingent Assets

Information collected and analyzed for contingent assets is obtained through the same process described above. Similarly to contingent liabilities, there is no Umoja accounting entry for contingent assets - instead, they are disclosed in the notes to the financial statements.

The most common of these contingent assets are those considered in Chapter on Revenue from Non-Exchange Transactions.

3.4            Desktop Procedures: Worked Example

In this example, we will examine the process by which accounting entries for a legal case are derived and entered into Umoja. The cases that are analyzed here are originally booked through FBS1 T-code and thus are automatically reversed by Umoja in the next reporting period.

3.4.1        Background

The Accounts Division is preparing the UN Secretariat Volume I financial statements for the year ended 31 December 20X1. It wishes to determine whether provisions need to be established at the reporting date for legal cases in which the UN Secretariat is involved.

At the end of the previous reporting period (31 December 20X0), Volume I had recognized the following current provisions for legal cases:

No non-current provisions were reported at 31 December 20X0.

In addition, a contingent liability for USD 3,000,000 was disclosed in the notes to the financial statements (Case 4).

3.4.2        Step 1: Information request

Prior to the end of the year 31 December 20X1, as part of the closing instructions process, the accounting team issues an information request to the OLA, requesting details on all pending cases(see template used in section 5 below). It is specified that this should cover all legal cases open at 31 December 20X1, in addition to those settled or closed in the year.

3.4.3        Step 2: Identification and measurement

On 1 February 20X2, the legal department submits the following response to the information request:

The four cases noted from 20X0 are listed, plus one additional case (Case 5) which is new for 20X1.

An expenses report run from Umoja for legal expenses showed that USD 1.5 million of expenses had been charged in 20X1 in relation to the provision for Case 2

It is also understood that the impact of discounting the provisions to their net present value is immaterial, and that cases are expected to be settled in the next reporting period. It is therefore not necessary to discount the provision to its net present value, and all provisions will be classified as current.

3.4.4        Step 3: Submissions Review Process

On receipt of this information, the Accounts Division will then review to ensure that it is accurate and complete, and supported by relevant documentation. In this example we will assume that all information has been provided to the Accounts Division, and that discussions have been held between the Accounts Division and the OLA for all cases where the obligation and/or probability was unclear.

3.4.5        Step 4 & 5: Accounting assessment and Umoja accounting entry

Now that all relevant information has been received and reviewed, the Accounts Division can determine the accounting impact based on the information provided by OLA.

Each claim will be reviewed on a case-by-case basis to determine the movements in the case in 20X1 and the appropriate Umoja accounting entries described.

Note on reversing prior-year provision accruals

Before determining the appropriate accounting entries for 20X1, it should be noted that the accounting entries made for the provisions recognized at 31 December 20X0 will be automatically reversed on 1 January 20X1. The accounting entry for this reversal is:

Reversal of prior reporting period provision:

Following this reversal, the correct accounting entries for 20X1 can then be considered.

Case 1: Adjustment to a provision

In 20X0, the claim was deemed to have met the provisions recognition criteria and a provision of USD 5 million was recognized as at 31 December 20X0. Based on the information received for 31 December 20X1, the claim still meets these recognition criteria, and thus a provision for this claim should be maintained.

The OLA increased the estimate of the probable settlement by USD 1 million from USD 5 million to USD 6 million. This is a change in the accounting estimate relating to the measurement of the provision, and hence the provision will need to be increased by USD 1 million on the Statement of Financial Position from the value recognized in 20X0, with an equal expense recognized in the Statement of Financial Performance in 20X1.

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Conclusion: Adjustment to increase provision by USD 1 million from 20X0 value.

The Umoja accounting entry for 20X1 will need to take into account the closing value of the provision as at 31 December 201X, as the entry made in 20X0 was reversed at the start of 20X1. Therefore the accounting entry will be for USD 6 million and not just the USD 1 million increase in the year.

Case 2: Utilizing a provision

In 20X0, the claim was deemed to have met the provisions recognition criteria and a provision of USD 2 million was recognized as at 31 December 20X0. Based on the information received for 31 December 20X1, the claim still meets these recognition criteria, and thus a provision for this claim should be maintained.

In 20X1 an interim payment of USD 1.5 million was paid and an estimated USD 500,000 remains at the end of the reporting period (this is still a provision rather than an accrual due to the uncertainty of amount and timing). The USD 1.5 million decrease is confirmed by the report run from Umoja which showed Dr Expenses and Cr Accounts Payable.

The payment of USD 1.5 million represents the utilization of the provision - therefore the y/e 20X1 provision would be already reflective of the USD 1.5 million reduction, and only USD 500,000 would be recorded as provision.

Conclusion: Utilization of the USD 1.5 million provision

The Umoja accounting entry is as follows:

Amount noted above would be reported by OLA via provisions reporting template which then would serve as a basis for provisions note disclosure compilation. And since remaining balance of USD 500,000 is already reflected in the OLA y/e submission (USD 6 million), there is no need to book an entry of USD 500,000 as noted above.

To record the balance of provision at y/e 20X1:

Case 3: Reversing a provision

In 20X0, Case 3 was deemed to have met the provisions recognition criteria and a provision of USD 7 million had been raised. Based on the information received for 31 December 20X1, the claim no longer meets these recognition criteria as the outflow is now possible rather probable (i.e. less than a 50% probability), and thus the provision for this claim should be reversed.

The full value of the provision (USD 7 million) will thus be derecognized from the statement of financial performance, and a corresponding credit will be recognized on the statement of financial performance, resulting in an increase in net assets.

A contingent liability will then be disclosed for the possible outflow of USD 2 million.

Conclusion: Reversal of a provision by USD 7 million.

No Umoja accounting entry is required as the provision has already been reversed automatically at the start of the reporting period.

No entries are required in Umoja for disclosing contingent liabilities.

Cases 4 & 5: Recognition of provisions

In 20X0, it was determined that Case 4 was did not meet the provisions recognition criteria and instead a contingent liability was disclosed. Case 5 is new in 20X1 and thus no provision had been recognized in 20X1.

At 31 December 20X1, both cases are deemed to have met the provisions recognition criteria. As no provision exists in the financial statements for these two cases, two new provisions should be recognized in the statement of financial position, for USD 3 million and USD 10 million respectively. Expenses of USD 3 million and USD 10 million will be recognized in the statement of financial performance.

As the contingent liability is for disclosure purposes only, no entries are required.

Conclusion: Raise new provisions for USD 3 million and USD 10 million (USD 13 million total).

The Umoja accounting entry is as follows:

Note: detailed guidance on the process of raising of manual and reversing JVs can be found in section 3.2 of General Ledger Chapter.

3.5            Desktop Procedures: Events after the Reporting Date

Information collected and analyzed for events after the reporting date is obtained through the same process described for provisions in section 3.1.1 above. The final stage of the process does however differ, as Umoja accounting entries will only be made for adjusting events as defined in section 2.2 above; accounting disclosures are made for non-adjusting events:

T.      Information request:

T.1.      As part of the year-end closing instructions, an information request should be sent to each office/mission requesting details of any significant occurring events after the reporting date. An addendum of examples of typical events after the reporting date can also be included within the closing instructions to assist staff in identifying such events.

T.2.      This information request should contain the following information (as a minimum):

T.2.1.      Nature and date of event (s);

T.2.2.      Name of the office which is reporting the event;

T.2.3.      Details of principal assets or (contingent) liabilities associated with the event (s);

T.2.4.      Details of financial impact (if known); and

T.2.5.      Any further useful narrative (such as the details and timing of any future events which will assist the narrative description).

U.     Accounting assessment:

U.1.     Upon receipt of the responses to the information request, the Accounts Division will review the information received and determine whether the event in question should be classified as an adjusting or non-adjusting event after the reporting date.

V.      Umoja entries / accounting disclosure:

V.1.      Entries are made in Umoja to record adjusting events using manual JVs. Accounting entries will depend on the nature of the events in question.

V.2.      No Umoja entries are made for non-adjusting events; instead accounting disclosures are made where necessary.

V.3.      The Accounts Division should maintain an excel sheet containing the key details regarding each significant non-adjusting event requiring disclosure.

Further details regarding accounting for contingent liabilities can be found in Corporate Guidance on Events After the Reporting Date, including required disclosures.

4         Business Partners

Provisions are recognized through manual JVs (T-code: FV50 for non-reversing entries and FBS1 for reversing entries) only, which means that there are no specified Umoja business partners, roles and responsibilities relating directly to provisions, contingent liabilities and contingent assets.

Section A.3above indicates relevant stakeholders that may be responsible to provide information on provisions, contingent liabilities and contingent assets as part of the Accounts Division information request and review process.

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