12. Payables, provisions and contingent liabilities

Question 1

Liabilities:

1. What is a liability?
2. What is a current liability? Give examples (3)
3. What is a non-current liability? Give an example.

Answer 1

1. A liability is a present obligation due to a past event resulting in economic outflow from an entity.
2. A liability that is payable within 12 months. I.e. short term loan, overdraft and payables.
3. A liability that is payable in over 12 months - a long-term loan, for example.

Question 2

Credit and cash purchases:

1. How do you post a cash purchase?
2. How do you post a credit purchase? (2)

Answer 2

1. Dr expense, Cr cash
2. Dr expense, Cr payables
   Dr payables, Cr cash

Question 3

Provisions:

1. What is a provision?
2. How do you post a provision?
3. Which accounting standard is responsible for provisions?
4. How does this accounting standard recognise provisions? (3)

Answer 3

1. A provision is a liability with unknown value or unknown timing.
2. Dr expense, Cr provisions
3. IAS 37
4. • present obligation because of a past event
     - this results in economic outflow
     - reliable estimate an be made

Question 4

Obligations:

1. A legal obligation can be derived from? (3)
2. A constructive obligation is derived from? (2)

Answer 4

1. • terms of a contract
     - legislation
     - other operations of law
2. • accepted responsibility
     - will discharge those responsibilities.

Question 5

Contingency:

1. What is a contingent liability?
2. What is a contingent asset?
3. How do we account for these?

Answer 5

1. A liability that will be determined by future events not wholly controlled by the entity.
2. An asset that will be determined by future events not wholly controlled by the entity.
3. Contingent liabilites: anything from possible to extremely likely (51%+) we account for. A disclosure note for possible (5 - 50%).

Contingent assets: Extremely likely (95%+) we account for. Probable (51 - 95%) requires a disclosure note

3.

Question 6

What does the IAS 37 state about contingent liabilities? (3)

Answer 6

• Recorded as provisions to highlight uncertainty
• Movement recorded each year
• Disclosure note should include:
  
  • nature of contingency
  • uncertain factors
  • likely economic effect