European Communities Accounting Rule 10 PDF

EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN COMMUNITIES ACCOUNTING RULE 10 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS  EUROPEAN COMMISSION Budget...

EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN COMMUNITIES ACCOUNTING RULE 10 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 2 of 17 INDEX 1. Objective.......................................................................................................................................4 2. Scope.............................................................................................................................................4 3. Definitions.....................................................................................................................................4 4. Recognition...................................................................................................................................6 4.1 Recognition criteria..............................................................................................................6 4.2 Present Obligation................................................................................................................6 4.3 Past Event.............................................................................................................................7 4.4 Probable Outflow of Resources Embodying Economic Benefits or Service Potential........8 4.5 Reliable Estimate of the Obligation.....................................................................................8 4.6 Contingent Liabilities...........................................................................................................8 4.7 Contingent Assets.................................................................................................................9 5. Measurement.................................................................................................................................9 5.1 Best Estimate........................................................................................................................9 5.2 Risks and Uncertainties......................................................................................................10 5.3 Present Value......................................................................................................................10 5.4 Future Events......................................................................................................................10 5.5 Reimbursements.................................................................................................................11 5.6 Changes in provisions.........................................................................................................11 5.7 Usage of provisions............................................................................................................12 5.8 Onerous Contracts..............................................................................................................12  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 3 of 17 6. Disclosures..................................................................................................................................12 7. Effective date...............................................................................................................................14 8. Reference to other rules...............................................................................................................14  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 4 of 17 1. Objective The objective of this EC accounting rule is to define provisions, contingent liabilities and contingent assets, identify the circumstances in which provisions should be recognised, how they should be measured and the disclosures that should be made about them. This rule also requires that certain information be disclosed about contingent liabilities and contingent assets in the notes to the financial statements to enable users to understand their nature, timing and amount. 2. Scope The EC and its consolidated bodies, since they prepare and present financial statements under the accrual basis of accounting, shall apply this accounting rule in accounting for provisions, contingent liabilities and contingent assets, except: a) Those covered by another EC accounting rule; b) Provisions for income taxes or income tax equivalents; c) Provisions arising from employee benefits; d) Some amounts that might be treated as provisions but which relate to recognition of revenue (i.e. guarantees in return for a fee); e) Provisions or contingencies arising from social benefits granted by the European Communities for which no direct charge is levied in return from the recipients of the benefit (i.e. social policy obligations). This rule applies to financial instruments (including guarantees) that are not carried at fair value. 3. Definitions The following terms are used in this rule with the meanings specified: 1) A constructive obligation is an obligation that derives from the European Communities' actions where: a) By an established pattern of past practice, published policies or a sufficiently specific current statement, the European Communities have indicated to other parties that they will accept certain responsibilities; and b) As a result, the European Communities have created a valid expectation on the part of those other parties that they will discharge those responsibilities.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 5 of 17 2) A contingent asset is a possible asset that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the European Communities. 3) A contingent liability is: a) A possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the European Communities; or b) A present obligation that arises from past events but is not recognised because: i. It is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; or ii. The amount of the obligation cannot be measured with sufficient reliability. 4) A legal obligation is an obligation that derives from: a) A contract (through its explicit or implicit terms); b) Legislation; or c) Other operation of law. 5) Liabilities are present obligations of the European Communities arising from past events, the settlement of which is expected to result in an outflow from the European Communities of resources embodying economic benefits or service potential. 6) An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. 7) An onerous contract is a contract for the exchange of assets or services in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits or service potential expected to be received under it. 8) A provision is a liability of uncertain timing or amount. Provisions can be distinguished from other liabilities such as payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast: a) Payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier (and include payments in respect of social benefits where formal agreements for specified amounts exist); and b) Accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. Accruals are often reported as part of accounts payable, whereas provisions are reported separately. 9) Relationship between Provisions and Contingent Liabilities In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this EC Accounting Rule the term “contingent” is used for liabilities and assets  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 6 of 17 that are not recognised because their existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the entity. In addition, the term “contingent liability” is used for liabilities that do not meet the recognition criteria. This EC Accounting Rule distinguishes between: (a) Provisions — which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligations; and (b) Contingent liabilities — which are not recognised as liabilities because they are either: (i) Possible obligations, as it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources embodying economic benefits or service potential; or (ii) Present obligations that do not meet the recognition criteria in this EC Accounting Rule (because either it is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made). 4. Recognition 4.1 Recognition criteria A provision should be recognised when: 1) The European Communities have a present obligation (legal or constructive) as a result of a past event; 2) It is probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; and 3) A reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. 4.2 Present Obligation 1) In some cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the reporting date. 2) In most cases it will be clear whether a past event has given rise to a present obligation. In other cases, for example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such cases, the European Communities  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 7 of 17 determines whether a present obligation exists at the reporting date by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the reporting date. On the basis of such evidence: (a) Where it is more likely than not that a present obligation exists at the reporting date, the European Communities recognises a provision (if the recognition criteria are met); and (b) Where it is more likely that no present obligation exists at the reporting date, the European Communities discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits or service potential is remote. 3) Provisions should not be recognised for net deficits from future operating activities. 4.3 Past Event 1) A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the European Communities have no realistic alternative to settling the obligation created by the event. This is the case only: (a) Where the settlement of the obligation can be enforced by law; or (b) In the case of a constructive obligation, where the event (which may be an action of the European Communities) creates valid expectations in other parties that the European Communities will discharge the obligation. 2) Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to continue the ongoing activities in the future. The only liabilities recognised in the European Communities’ balance sheet are those that exist at the reporting date. 3) It is only those obligations arising from past events existing independently of future actions of the European Communities (that is, the future conduct of activities) that are recognised as provisions. As an example, a public sector entity would recognise a provision for the decommissioning costs of a government-owned nuclear power station to the extent that the entity is obliged to rectify damage already caused. 4) An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed — indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a decision by an entity’s management, governing body or controlling entity does not give rise to a constructive obligation at the reporting date unless the decision has been communicated before the reporting date to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will discharge its responsibilities.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 8 of 17 5) An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act (for example, a sufficiently specific public statement) by the entity gives rise to a constructive obligation. 6) Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. For the purpose of this EC Accounting Rule, such an obligation is treated as a legal obligation. In many cases, it is not possible to judge whether a proposed new law is virtually certain to be enacted as drafted and any decision about the existence of an obligation should await the enactment of the proposed law. 4.4 Probable Outflow of Resources Embodying Economic Benefits or Service Potential 1) For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits or service potential to settle that obligation. For the purpose of this EC Accounting Rule, an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, that is, the probability that the event will occur is greater than the probability that it will not. Where it is not probable that a present obligation exists, the European Communities discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits or service potential is remote. 2) Where there are a number of similar obligations the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one item may be small, it may well be probable that some outflow of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is recognised (if the other recognition criteria are met). 4.5 Reliable Estimate of the Obligation 1) The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other assets or liabilities. Except in extremely rare cases, the European Communities will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. 2) In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability. 4.6 Contingent Liabilities 1) The European Communities should not recognise a contingent liability. A contingent liability is disclosed unless the possibility of an outflow of resources embodying economic benefits or service potential is remote.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 9 of 17 2) Where an entity is jointly and severally liable for an obligation the part of the obligation that is expected to be met by other parties is treated as a contingent liability. For example, in the case of joint venture debt, that part of the obligation that is to be met by other joint venture participants is treated as a contingent liability. The entity recognises a provision for the part of the obligation for which an outflow of resources embodying economic benefits or service potential is probable, except in the rare circumstances where no reliable estimate can be made. 3) Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits or service potential has become probable. If it becomes probable that an outflow of future economic benefits or service potential will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made). 4.7 Contingent Assets 1) The European Communities should not recognise a contingent asset. A contingent asset is disclosed where an inflow of economic benefits or service potential is probable. 2) Contingent assets usually arise from unplanned or other unexpected events that are not wholly within the control of the European Communities and give rise to the possibility of an inflow of economic benefits or service potential to the European Communities. An example is a claim that the European Communities are pursuing through legal processes, where the outcome is uncertain. 3) Contingent assets are not recognised in financial statements since this may result in the recognition of revenue that may never be realised. However, when the realisation of revenue is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. 4) Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits or service potential will arise and the asset’s value can be measured reliably, the asset and the related revenue are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits or service potential has become probable, the European Communities discloses the contingent asset.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 10 of 17 5. Measurement 5.1 Best Estimate 1) The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the reporting date. The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the reporting date or to transfer it to a third party at that time. The estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the reporting date. 2) The estimates of outcome and financial effect are determined by the judgment of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the reporting date. 3) Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is “expected value”. The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60% or 90%. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used. 4) Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the entity considers other possible outcomes. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. 5.2 Risks and Uncertainties The risks and uncertainties that inevitably surround many events and circumstances should be taken into account in reaching the best estimate of a provision. Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgments under conditions of uncertainty, so that revenue or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 11 of 17 probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision. 5.3 Present Value 1) Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation. 2) When a provision is discounted over a number of years, the present value of the provision will increase each year as the provision comes closer to the expected time of settlement. 3) The discount rate (or rates) should be a rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) should not reflect risks for which future cash flow estimates have been adjusted. As an example, the zero coupon Euro bond yield curve can often be used as discount rate suitable for EC bodies. 5.4 Future Events 1) Future events that may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that they will occur. 2) Expected future events may be particularly important in measuring provisions. For example, certain obligations may be index linked to compensate recipients for the effects of inflation or other specific price changes. If there is sufficient evidence of likely expected rates of inflation this should be reflected in the amount of the provision. 3) It is appropriate to include, for example, expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex operation than has previously been carried out. However, an entity does not anticipate the development of a completely new technology unless it is supported by sufficient objective evidence. 4) The effect of possible new legislation which may affect the amount of an existing obligation of a government or an individual public sector entity is taken into consideration in measuring that obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that arise in practice makes it impossible to specify a single event that will provide sufficient, objective evidence in every case. Evidence is required both of what legislation will demand and of whether it is virtually certain to be enacted and implemented  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 12 of 17 in due course. In many cases, sufficient objective evidence will not exist until the new legislation is enacted. 5) Gains from the expected disposal of assets should not be taken into account in measuring a provision. 5.5 Reimbursements 1) Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement should be treated as a separate asset. The amount recognised for the reimbursement should not exceed the amount of the provision. 2) In the economic outturn account, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. 3) In some cases, the European Communities will not be liable for the costs in question if the third party fails to pay. In such a case, the European Communities has no liability for those costs and they are not included in the provision. 5.6 Changes in provisions Provisions should be reviewed at each reporting date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation, the provision should be reversed: a) In the same account that it was originally charged if the reversal occurs in the same reporting period as the recognition of the provision; or b) As revenue, if the reversal occurs in a different reporting period from the recognition of the provision. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is recognised as an interest expense. 5.7 Usage of provisions A provision should be used only for expenditures for which the provision was originally recognised. Then, the existing provision should be used and expenses charged against it.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 13 of 17 5.8 Onerous Contracts 1) If an entity has a contract that is onerous, the present obligation (net of recoveries) under the contract should be recognised and measured as a provision. 2) Contracts to provide social benefits entered into with the expectation that the European Communities does not receive consideration that is approximately equal to the value of goods and services provided, directly in return from the recipients of those benefits are excluded from the scope of this EC accounting rule. 3) Many contracts evidencing exchange transactions (for example, some routine purchase orders) can be cancelled without paying compensation to the other party, and therefore there is no obligation. Other contracts establish both rights and obligations for each of the contracting parties. Where events make such a contract onerous, the contract falls within the scope of this EC accounting rule and a liability exists which is recognised. 4) This EC accounting rule defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits or service potential expected to be received under it which includes amounts recoverable. Therefore, it is the present obligation net of recoveries that is recognised as a provision. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. 5) Before a separate provision for an onerous contract is established, the European Communities recognises any impairment loss that has occurred on assets dedicated to that contract. 6. Disclosures 1) For each class of provision, the European Communities should disclose: a) The carrying amount at the beginning and end of the period; b) Additional provisions made in the period, including increases to existing provisions; c) Amounts used (that is, incurred and charged against the provision) during the period; d) Unused amounts reversed during the period; and e) The increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate. Comparative information is not required.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 14 of 17 2) The European Communities should disclose the following for each class of provision: a) A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits or service potential; b) An indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, the European Communities should disclose the major assumptions made concerning future events, as mentioned in paragraph 5.4; and c) The amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. 3) Where the European Communities elects to recognise in its financial statements provisions for social benefits for which it does not receive consideration that is approximately equal to the value of goods and services provided, directly in return from the recipients of those benefits, it should make the disclosures required in paragraphs 1 and 2 in respect of those provisions. 4) Unless the possibility of any outflow in settlement is remote, the European Communities should disclose for each class of contingent liability at the reporting date a brief description of the nature of the contingent liability and, where practicable: a) An estimate of its financial effect, measured under chapter 5; b) An indication of the uncertainties relating to the amount or timing of any outflow; and c) The possibility of any reimbursement. 5) In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary to consider whether the nature of the items is sufficiently similar for a single statement about them to fulfil the requirements of paragraphs 2 (a) and (b) and 4 (a) and (b). Thus, it may be appropriate to treat as a single class of provision amounts relating to one type of obligation, but it would not be appropriate to treat as a single class amounts relating to environmental restoration costs and amounts that are subject to legal proceedings. 6) Where a provision and a contingent liability arise from the same set of circumstances, the European Communities makes the above mentioned disclosures in a way that shows the link between the provision and the contingent liability. 7) The European Communities may in certain circumstances use external valuation to measure a provision. In such cases, information relating to the valuation can usefully be disclosed.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 15 of 17 8) Where an inflow of economic benefits or service potential is probable, the European Communities should disclose a brief description of the nature of the contingent assets at the reporting date, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in chapter 5. 9) The disclosure requirements in paragraph 8 are only intended to apply to those contingent assets where there is a reasonable expectation that benefits will flow to the European Communities. That is, there is no requirement to disclose this information about all contingent assets. It is important that disclosures for contingent assets avoid giving misleading indications of the likelihood of revenue arising. 10) Where any of the information required by paragraphs 4 and 8 is not disclosed because it is not practicable to do so, that fact should be stated. 11) In extremely rare cases, disclosure of some or all of the information required by paragraphs 1 to 9 can be expected to prejudice seriously the position of the European Communities in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, the European Communities need not disclose the information, but should disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed. 7. Effective date This rule shall be effective for annual financial statements covering periods beginning on or after 1 January 2010. 8. Reference to other rules IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 16 of 17 Annex 1: Decision tree Yes No EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EC ACCOUNTING RULE 10: PROVISIONS, CONTINGENT LIABILITIES Date: 15/12/2009 AND CONTINGENT ASSETS Page 17 of 17 Annex 2: The following decision tree disclosed hereafter summarises the main recognition requirements for contingent assets. Start Is the inflow of economic Yes Recognise the asset in the benefits or service potential financial statements virtually certain? No Is the inflow of economic Yes Disclose contingent asset benefits or service potential probable? No Is the inflow of economic Yes Do nothing benefits or service potential not probable?