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.


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.