10.1 IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Question 1

What does IAS 37 cover

Answer 1

• Recognition criteria and measurement bases are applied to Provisions, Contingent Liabilities and Contingent Assets
• Information is disclosed in the notes to the accounts to enable users to better understand nature, timing and amount of any provisions or contingencies

Question 2

What does IAS 37 seek to prevent

Answer 2

• Prevents management from creating provisions solely for smoothing profits
• For instance in a good time you can take some of the profits and sit in on the SFP as a provision and dissolve it back to the P&L when profits are down
• This is seen as creative accounting as it doesn’t show a true story about the nature of the company

Question 3

Does IAS 37 total stop previsions

Answer 3

IAS 37 doesn’t stop provisions just only allows them when they can be properly justified

Question 4

What is a provision

Answer 4

A liability of uncertain timing or amount

Question 5

What is a liability

Answer 5

A present obligation arising from past events which is expected to cause a outflow of resources

Question 6

What is a asset

Answer 6

Resources controlled by the entity, as a result of past events, that are expected to cause an inflow of resource

Question 7

What makes something contingent

Answer 7

Something that might happen in the future

Question 8

What are the three criteria for recognising a provision

Answer 8

1. There is a present obligation from a past event
   a. Cannot be the intention as this would allow the creative manipulation of being able to cancel it in following years
2. A reliable estimate can be made of the amount of the obligation
3. It is probably that the outflow will occur
   a. This means more likely than not

Question 9

What makes a present obligation

Answer 9

It can be either
1. Legal or contractual
a. Following laws or contracts
2. Constructive
a. Based on past practices which establishes an expectation
b. A retailer always refunds the price paid for returned items when a consumer changes their mind

Question 10

What makes a realistic estimate

Answer 10

• Provisions should be made at the best estimate
• If the provision relates to one event
  o It should be measured using the most likely outcome
  o E.g., a potential liability from a court case
• If the provision is made up of numerous events
  o Measured using expected values
  o E.g., provision to make repairs to faulty goods within a year of sale

Question 11

What are the probabilities for something occurring

Answer 11

If an event is
* Probable = Provision should be made
* Not Probable = No Provision should be made
* Possible liability = record a contingent liability instead

Question 12

What is a contingent liability

Answer 12

• A possible obligation that arises from past events and will only be confirmed by the occurrence (or non-occurrence) of uncertain future event(s) not wholly withing the control of the entity
  Or
• A present obligation that arises from past events but is not recognised because
  o It is not probable that an outflow of resources (£) will be required to settle the obligation
  Or
  o The amount of the obligation cannot be measured with sufficient reliability

Question 13

What are the disclosure requirements for a contingent liability

Answer 13

• A contingent liability is disclosed as a note to the accounts only
• No entries are made in the financial statements

Question 14

What is a contingent asset

Answer 14

• A potential asset that arises from past events
• Its existence will only be confirmed by the occurrence (or non-occurrence) of uncertain future event(s) not wholly withing the control of the entity

Question 15

Should contingent assets be recognised

Answer 15

• Contingent assets would not normally be recognised.
• However, if it is probable that there will be an inflow (£), they should be disclosed.