10. Provisions And Contingencies

Question 1

Provisions: When should a provision be recognized?

Answer 1

1. Present obligation as a result of past event
   (Legal or constructive)
2. Probable outflow of resources embodying economic benefits will be required to settle the obligation
3. A reliable estimate can be made of the amount

Question 2

Provisions: When is a provision probable?

Answer 2

Greater than 50% probability

Question 3

Provisions: What to do if a provision can’t be recognized?

Answer 3

Consider a contingent liability

Question 4

Provisions: What is usually the best estimate for a single obligation?
e.g. legal case

Answer 4

Most likely outflow

(Unless other possible outcomes are mainly higher or lower)

Question 5

Provisions: What is usually the best estimate when there is a large population of items?
e.g. standard warranties

Answer 5

Expected value method

Discounted to PV
(Where this effect material)
Subsequently unwound

Question 6

Provisions: Where does the DR entry for a provision for dismantling costs go?

Answer 6

PPE

(Not P&L)

(Then released to the P&L through depn)

Question 7

When should provisions be reviewed?

Answer 7

At each reporting date

(Including estimated cash flows and any discount rates used)

Question 8

Can a provision be used for an expense it was not originally created for?

Answer 8

No

Question 9

Where should any difference in a provision be recognized?

Answer 9

P&L

Question 10

Should expected gain/loss on disposal be considered when creating provisions?

Answer 10

No

Question 11

Can a provision be made for future operating losses?

Answer 11

No

Question 12

Provisions: Onerous contract definition

Answer 12

Unavoidable costs
of meeting obligations
exceed the economic benefits of the contract

Question 13

Provisions: Onerous contracts: Unavoidable costs calculation

Answer 13

LOWER of

1. Cost of fulfilling contract
   (Directly relate to contract)
   (Including incremental costs e.g. direct labor/materials)
   (AND an allocation of other costs e.g. depn of machinery used)
2. Compensation/penalties from not fulfilling contract

Question 14

Provisions: onerous contracts: When should be recognized?

Answer 14

When contract becomes onerous

(Then reduced by payments made in subsequent periods)

Question 15

Restructuring provision: When can a provision only be made?

Answer 15

1. Detailed, formal and approved plan
2. Plan announced to those affected (e.g. employees)

Question 16

Restructuring provision: What should it include?

Answer 16

Direct expenditure arising from restructuring

Question 17

Restructuring provision: What should it exclude?

Answer 17

Costs associated with ongoing activities

Question 18

Provisions: Disclosures

Answer 18

1. Brief description
   And expected timing
2. Indication of outflow uncertainties
3. Expected reimbursement
   Amount of any asset recognized for it

Question 19

Provisions: Treatment: Uncertain liability: Remote

Answer 19

Ignore

Question 20

Provisions: Treatment: Uncertain liability: Possible

Answer 20

Disclose as contingent liability

Question 21

Provisions: Treatment: Uncertain liability: Probable

Answer 21

Provision
(assuming criteria met)

Question 22

Contingent liabilities: Disclosures:

Answer 22

1. Brief description
2. Estimate of financial effect
3. Uncertainties
   a. Amount
   b. Timing
4. Reimbursement possibility

Question 23

Provisions: Uncertain assets: Recognition: Remote

Answer 23

Ignore

Question 24

Provisions: Uncertain assets: Recognition: Possible

Answer 24

Ignore

Question 25

Provisions: Uncertain assets: Recognition: Probable

Answer 25

contingent asset

Question 26

Provisions: Uncertain assets: Recognition: Virtually certain

Answer 26

Recongise the asset

Question 27

Contingent assets: Disclosures

Answer 27

1. Description
2. Financial effect estimate (where practical)

Question 28

Recognizing virtually certain asset DE

Answer 28

DR receivable

CR Other Income (P&L)

Question 29

Provision: Claim reimbursement: Conditions

Answer 29

1. Reimbursement virtually certain
2. Settlement of claim probable

Question 30

Provisions: Reimbursement: Treatment: What to record in notes?

Answer 30

1. Provision
2. Associated asset

Question 31

Provisions: Reimbursement: Can the P&L amounts be netted off?

Answer 31

Yes

Question 32

Provisions: Reimbursement: Can the balance sheet amounts be netted off?

Answer 32

No

Separate asset and liability

Question 33

Provisions: Reimbursement: Can the amount of the asset exceed the amount of the provision?

Answer 33

No