20 November 2020

The impact of coronavirus may mean that entities need to account for new provisions for restructuring costs, amend current provision estimates, consider if contracts have become onerous and deal with recognising and measuring insurance policies.

What does FRS 102 say?

FRS 102 (section 21.4) states that an entity should recognise a provision when:

  • the entity has an obligation (legal or constructive) at the reporting date as a result of a past event; 
  • it is probable (ie more likely than not) that the entity will be required to transfer economic benefit in settlement; and 
  • the amount of the obligation can be estimated reliably. 

The provision should be measured at the best estimate of the amount required to settle the obligation at the reporting date. 

FRS 102 also says that:

  • an entity should recognise a provision for restructuring costs, including termination benefits, only when it has a legal or constructive obligation at the reporting date to carry out the restructuring (examples 6 and 7 in the appendix to section 21 provide guidance on closures announced before and after the year-end);
  • termination benefits should be recognised as an expense immediately when the entity is demonstrably committed to either terminate the employment before the normal retirement age, or to provide termination benefits as a result of an offer made in order to encourage voluntary redundancy (paragraph 28.34);
  • provisions for future operating losses should not be recognised (paragraph 21.16 and 21.11B); and 
  • the present obligation under an onerous contract should be recognised and measured as a provision.

Practical impact and interpretation for preparers

Entities may need to amend current provision estimates (discount rates, warranty and other returns rates etc) as the underlying assumptions are likely to have changed as a result of current market conditions.

Restructuring provisions

Where a plan to close or downsize the business has been made and announced before the end of the reporting period, entities may need new provisions for restructuring costs.

When recognising a provision for restructuring the key consideration is whether:

  • a detailed formal plan has been made; and
  • it has raised a valid expectation in those affected by starting implementation or announcing the plan’s features before the end of the reporting period.

Where a restructuring plan will take a long time to complete, with varying stages, only those stages that the entity is committed to at the reporting date should be provided for. For example, if plans included redundancies immediately, but the potential closure of a site in the next year, only redundancy costs should be included at the reporting date.

Only those costs which are directly related to the restructuring can be included in the provision ie those that are both necessarily required by the restructuring and not associated with ongoing activities.

A particular coronavirus scenario could be that an entity had announced redundancies before the 31 March 2020 year end but then took advantage of the Coronavirus Job Retention scheme to bring these workers back onto the payroll and furlough them from 1 March. If a decision had not been taken to use the job retention scheme to re-employ these workers as at 31 March 2020, no adjustments would be included at that date. Whereas if the directors had decided to use the job retention scheme and announced it by 31 March 2020, then all such costs, assets and provisions, would be recognised even if the measurement took some time to be finalised.

Provisions for future trading losses / costs

Under the FRS 102 and the going concern accounting principles, other than provisions for onerous contracts, businesses must not book provisions for future trading losses as such costs are only booked when incurred.

This is explained more fully in FRS 102 21.6 and in example 1 to the appendix of section 21:

“Obligations that will arise from the entity’s future actions (ie the future conduct of its business) do not satisfy the condition in paragraph 21.4(a), no matter how likely they are to occur and even if they are contractual. To illustrate, because of commercial pressures or legal requirements, an entity may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a particular type of factory). Because the entity can avoid the future expenditure by its future actions, for example by changing its method of operation or selling the factory, it has no present obligation for that future expenditure and no provision is recognised.”

Onerous contracts

Entities may need to consider if contracts in place at the reporting date have become onerous ie the cost of fulfilling the contract is expected to outweigh the benefits.

At the commencement of contracts parties would expect to receive benefits that are greater than the cost of executing, however due to coronavirus, the obligations of performing that contract may now outweigh the benefits, for example:

  • raw material costs may have increased yet the sales price is fixed, or staff costs have increased due to restrictions in place;
  • penalty clauses in revenue contracts for non or late delivery have been triggered; and
  • operating lease contracts for assets no longer generating income.

If on review of the contract the cost outweighs the benefit, a provision should be recognised for the excess cost. Businesses should however ensure that provisions for future general operating losses across the business are not included.

Insurance recoveries

Some entities will have insurance policies that may provide a reimbursement for business interruption costs or to settle part or all of a provision. Whilst these should be considered at the same time as the provision, they will be recognised and measured separately.

When some or all of the amount required to settle a provision may be reimbursed (eg through an insurance claim for business interruption), the entity should only recognise the separate asset when it is virtually certain that the entity will receive such reimbursement. To recognise the recovery asset, the value of the reimbursement does not need to be virtually certain, only that the entity is virtually certain to receive it i.e. the reimbursement qualifies for recognition as an asset in its own right.

Where an entity is virtually certain of reimbursement then a reliable prudent estimate should be recognised as a separate asset on the balance sheet. Within the profit and loss account a net amount may be presented, being the anticipated cost of the obligation less the reimbursement.

If recovery is only probable, then a contingent asset should be disclosed.


Where termination benefits are included during the period, FRS 102 (para 28.43-44) requires disclosure for each category of termination benefit detailing the nature of the benefit, it’s accounting policy, and the amount of its obligation and extent of the funding at the reporting date.

Our advice

  • Keep up to date with government announcements and potential finance assistance before determining whether restructuring is required.
  • If a restructuring plan is agreed, consider if it triggers the need for an impairment review of assets linked to that division. 
  • Review the contracts in place to consider if any can be cancelled or re-negotiated without penalty to relieve the entity of any obligations eg force majeure. If they cannot be cancelled or re-negotiated without penalty, then consider whether the penalties are in the best interests of the entity and then update projects and recognise a provision as necessary.
  • Consider assumptions and estimates used in current provision calculations to ensure these are still applicable given changes in the current climate, for example returns rates for online orders.
  • Consider current business insurance cover to determine whether a potential claim against the costs can be made. This might involve detailed discussions with insurance brokers over the terms of insurance and over what period a loss needs to be suffered before a claim is considered.
  • Consider whether the business could use the 7-day rule when preparing accounts which may provide sufficient time to include items that were only decided in the first week after the year end.
  • Provide clear and relevant disclosures about the provision including the expected amount, timing, and any uncertainties, as well as specific termination benefits provided. 

For more information please contact Paul Merris and Lee Marshall.

Paul Merris
Partner, Head of Financial Reporting Advisory
Lee Marshall
Lee Marshall
Partner, Head of Accounting and Business Advisory
Paul Merris
Partner, Head of Financial Reporting Advisory
Lee Marshall
Lee Marshall
Partner, Head of Accounting and Business Advisory