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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II RECOGNITION AND MEASUREMENT CHAPTER III DISCLOSURE CHAPTER I GENERAL PROVISIONS Article 1. For the purpose of regulating the recognition and measurement of contingencies, and the disclosure of relevant information, these Standards are formulated in accordance with the Accounting Standards for Enterprises-Basic Standards. Article 2. The term "contingencies" refers to the conditions that arise from past transactions or events, the outcome of which will be confirmed only by the occurrence or non-occurrence of uncertain future events. Article 3. The contingencies arising from events such as employee wages and salaries, construction contracts, income taxes, business combination, leases, original insurance contracts, and re-insurance contracts shall be governed by other accounting standards. CHAPTER II RECOGNITION AND MEASUREMENT Article 4. An enterprise should recognize the related obligation of a contingency as an expected liability when the following conditions are satisfied: (1) That obligation is a present obligation of the enterprise; (2) It is likely to cause any economic benefit to flow out of the enterprise due to performance of the obligation; and (3) The amount of the obligation can be measured reliably. Article 5. The expected liability shall be initially measured according to the best estimate of the necessary expenses for the performance of the present obligation. If there is a continuous range for the necessary expenses and if all the outcomes within this range are equally likely to occur, the best estimate shall be determined according to the middle estimate within the range. In other cases, the best estimate shall be treated according to the following circumstances, respectively: (1) If the contingency involves a single item, it shall be determined on the basis of the most likely outcome; (2) If the contingency involves two or more items, the best estimate should be determined according to all possible outcomes and the relevant probabilities. Article 6. To determine the best estimate, an enterprise shall take into full account the risks, uncertainty, time value of money, and other factors related to the contingency. If the time value of money is of great significance, the best estimate shall be determined after discounting the relevant future outflow of cash. Article 7. When all or some of the expenses necessary for the settlement of an expected liability of an enterprise is expected to be reimbursed by a third party, the reimbursement should be separately recognized as an asset only when it is virtually certain that the reimbursement will be received. The amount recognized for the reimbursement should not exceed the carrying amount of the expected liability. Article 8. Where an executory contract becomes a loss contract, the obligation generated from the loss contract which satisfies the provisions of Article 4 of these Standards shall be recognized as an expected liability. The term "executory contract" refers to a contract the contractual obligations of which the parties concerned fail to perform, or some of the equal obligations have been performed. The term "loss contract" refers to a contract whose performance of the contractual obligations will inevitably incur costs in excess of the expected economic benefits. Article 9. An enterprise shall not recognize its future operating losses as expected liability. Article 10. If a restructuring obligations undertaken by an enterprise meets the provisions of Article 4 of these Standards, it shall be recognized as an expected liability. The simultaneous existence of the following circumstances indicates that the enterprise has undertaken the restructuring obligation: (1) Having a detailed formal restructuring plan, which covers the businesses involved in the restructuring, the main places, the number of employees to be compensated and the nature of their posts, the expected expenditure for the restructuring, the execution time of the plan; and (2) The restructuring plan has been announced to the general public. The term "restructuring" refers to the act of executing a plan made and controlled by an enterprise, which may substantially change the enterprise's organizational form, business scope or operating manner. Article 11. The enterprise shall determine the expected amount of liability on the basis of the direct disbursements related to the restructuring. The direct disbursements exclude the disbursements for the pre-post training of the employees who stay on to work, market promotion, new systems, marketing network, etc. Article 12. An enterprise shall review the carrying amount of the expected liability on the balance sheet date. If there is any exact evidence showing that the carrying amount can not really reflect present best estimate, it shall adjust the carrying amount according to the present best estimate. Article 13. No enterprise may recognize any contingent liability or contingent asset. The term "contingent liability" refers to a potential obligation that arises from past transactions or events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events; or refers to a present obligation that arises from a past transaction or event but is not recognized because the performance of the obligation is not likely to incur an outflow of economic benefits from the enterprise or because the amount of the obligation cannot be measured reliably. The term "contingent asset" refers to a potential asset that arises from a past transaction or event and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events. CHAPTER III DISCLOSURE Article 14. An enterprise shall, in its notes, disclose the following information related to the contingencies: (1) Expected liabilities: (a) The types and causes of the expected liabilities, as well as an explanation about the uncertainty of the outflow of economic benefits; (b) The changes at the beginning and end of the period, and the current changes in the expected liabilities; (c) The amount of expected compensations related to the expected liabilities, and the amount of excepted compensation which has been recognized in the current period; (2)Contingent liabilities (excluding those contingent liabilities of which the possibility of any outflow of economic benefits is remote): (a) The types and causes of the contingent liabilities, including the contingent liabilities arising from discounted commercial acceptance bills of exchange, pending litigations, pending arbitrations, and guarantees provided for the debts of other enterprises; (b) An explanation about the uncertainty of the outflow of the economic benefits; (c) An estimate of the expected financial effect of the contingent liabilities and the possibility of any reimbursement. If it is unable to make an estimate, the reasons shall be stated; (3) In general, no enterprise may disclose the contingent assets. However, if it is probable that a contingent asset will give rise to an inflow of economic benefits to the enterprise, the enterprise shall disclose the cause, the expected financial effect, etc. Article 15. In the case of a pending litigation or arbitration, if the disclosure of some or all information as required by Article 14 of these Standards can be expected to produce great unfavorable impact upon the enterprise, the enterprise need not disclose the information, but should disclose the nature of the pending litigation or arbitration as well as the truth and reasons for the failure to disclose the information. |
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