Provisions – an interesting example from a central bank
If you live in Ireland and are of a certain age, you’ll remember the above £20 note, and maybe even the older one with W.B Yeats on it. Now, we have euro notes of course, since 2002. So what if you had old pound notes? Well, when currencies change, there is usually a period of time during which the note can be redeemed at the Central Bank of the country in question. That is exactly the case in Ireland.
So where is the accounting in this you may be thinking? Bank notes have their origin in a “promise to pay the bearer on demand” as it used to say on old Irish currency, and still does on some bank notes. In other words, there is a liability on behalf of a bank to pay something – historically something like “pounds of silver”. In the case of the Irish Central Bank, there is still a liability to repay the the bearers of old currency, namely the Irish pounds. As recently reported, the Irish Central Bank has a provision in its accounts (specifically in the Statement of Financial Position) of €350 million for old notes and coins to be redeemed. This is 18 years after the notes ceased to be in circulation and be legal tender. This is why the term “provision” applies, as according to International Financial Reporting Standards a provision is “a liability of uncertain timing or amount”. In this case of the outstanding old Irish currency, the amount is certain, but the timing is not. I would imagine at some stage, the provision will be reversed, maybe 30 years for example, but until then, it will remain on the books of the Irish Central Bank.