Making provisions for (un)certain costs
In an individual decision on accounting law (IBB), the Accounting Standards
Commission (ASC) shows itself as a strict master of few words. The creation of a
provision is not permitted because we suspect there is uncertainty about the
expenditure.
Two years waiting for a permit
A company is active in the extraction of minerals. She wants to expand her
activities and has applied for it. However, the government that has to decide on
the expansion requires an environmental impact report and such a report can take
up to two years. Until then, no expansion permit can be issued. The company
already owns one of the sites it plans to work on and is negotiating with the
owners of several adjacent sites to conclude a concession agreement with them
for the extraction of minerals in exchange for compensation. Each concession
agreement contains a clause that automatically terminates the agreement if the
permit is not issued by the competent authorities within a period of three years
from the signature of the concession agreement.
The question that the company now has is whether, after signing such a
concession agreement, it may book a provision to take into account the future
costs that will be incurred for the extraction of raw materials. The company
also wants to create a provision to cover the costs associated with the urban
planning obligations included in the concession agreements.
Provisions for certain costs
Article 3:28 of the Companies and Associations Code (CAC) states that provisions
for risks and costs are intended by their nature to cover clearly defined losses
or costs that are probable or certain at the balance sheet date, but of which
the amount is not certain.
According to the company, the costs have a "probable or certain nature" from the
moment a concession agreement is concluded with a land owner. Even if the
extension permit has not yet been delivered and it is certain that it will not
be issued for the next two years. The company additionally argues that it is
obliged to make provisions, because this obligation is explicitly included in a
ASC advice of 1 December 1988 regarding the purchase, depreciation and
exploitation of natural resources under concession: In accordance with Article
19 of the Royal Decree Decree of 8 October 1976, provisions must be made to
cover the costs arising from the obligations thus entered into by the
operator.
ASC
However, the ASC delivers a negative advice, in exactly 3 sentences. In the
first sentence, she states that the provision is not allowed. In the second,
that the provision may only be created once the company has obtained the
expansion permit. And in the third sentence, she decides that she is therefore
issuing a negative opinion.
The Commission does not justify its opinion. We can only assume that according
to the ASC the costs are only probable or certain from the moment the extension
application has been approved. The concession agreement in itself is not
sufficient. This is of course facilitated by the fact that there is a resolutive
condition in the concession agreements.
But even if no resolutive condition were included, the chance is still small
that the Commission would allow the provision. This is apparent from the fact
that no provisions may be made for the land that the company already owned.
Without her saying it in so many words, it seems clear that the ASC interprets
the term certain costs in a very strict way.