15. IAS 37 and IAS 10 Flashcards
What is IAS 37?
Provisions, Contingent Liabilities and Contingent Assets
What were the three issues prior to IAS 37 being set up?
- Provisions were often presented as an intention to make expenditure, not an obligation to do so.
- Several items could be aggregated into one large provision that was reported as an exceptional item.
- It was difficult to ascertain the significance of the provision and any movements in the year.
Can you set up a provision for reorganisations?
No
What is a provision?
A liability of uncertain timing or amount
What are the three criteria for recognition of a provision?
- An entity has a present obligation as a result of a past event
- A reliable estimate can be made about the amount of the obligation
- It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
What are the two types of present obligation as a result of a past event?
(a) Legal/contractual
(b) Constructive – This is where the company establish a valid
expectation through a course of past practice, regardless of whether
there is a legal requirement to perform the task or not.
Is an intention to make a payment enough on its own to justify a
provision?
No, there must be an actual obligation to make a payment.
What do we record if the likelihood is
a) Possible
b) Probable
a) Contingent liability
b) Provision
What do we do with contingent liabilities?
Disclose in notes?
What do we do with the below probabilities with outflows?
a) Virtually certain
b) Probable
c) Possible
D) Remote
a) Recognise probability
b) Recognise provision
c) Disclose contingent liability (Notes)
d) Ignore
What do we do with the below probabilities with inflows?
a) Virtually certain
b) Probable
c) Possible
D) Remote
a) Recognise asset
b) Disclose contingent asset (Notes)
c) Ignore
d) Ignore
How do we recognise a provision?
Dr expense (Admin costs) Cr Provision (Liability)
How do we subsequently recognise a provision?
Dr Expense (Admin costs) Cr Provision (Liability)
Or decreased
DR Provision
Cr Expense
When is a warranty provision required?
And what does this imply?
At the time of sale
So its a past obligation which means an estimate of the obligation needs to be made using expected values.
If a company makes a guarantee to pay off a loan on behalf of another entity then how do we record that?
If the guarantee is probable then make a provision otherwise make a contingent liability
Do we need a provision for future operating losses/future repairs?
No provision may be made for future operating losses or repairs
because they arise in the future and can be avoided
Can a provision be made for restructuring?
A provision may only be made if:
- a detailed, formal and approved plan exists, and
- the plan has been announced to those affected.
What should a provision ]made for restructuring include?
The provision should:
include direct expenditure arising from restructuring
exclude costs associated with ongoing activities.
What are Adjusting events?
Events after the reporting date that provide additional evidence of conditions existing at the reporting date.
What are Non-adjusting events?
Events after the reporting date that concern conditions that arose after the reporting date.
Give four examples of adjusting events.
- irrecoverable debts arising after the reporting date, which may help to quantify the allowance for receivables as at the reporting date
- sale of inventory below cost, providing evidence of net realisable
value - amounts received or receivable in respect of insurance claims which were being negotiated at the reporting date
- the discovery of fraud or errors.
Give three examples of Non - adjusting events.
- a major business combination after the reporting date
- the destruction of a major production plant by a fire after the
reporting date - abnormally large changes in asset prices or foreign exchange rates after the reporting date.
How do we account for adjusting events?
Adjustment to the financial statements
How do we account for non-adjusting events?
Disclosed in a note
If of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions
Are proposed dividends that have not been approved adjusting events?
We account for dividends on a cash basis so they are non-adjusting
events after the reporting date and must be disclosed by note as
required by IAS 1.
