15. IAS 37 and IAS 10

Question 1

What is IAS 37?

Answer 1

Provisions, Contingent Liabilities and Contingent Assets

Question 2

What were the three issues prior to IAS 37 being set up?

Answer 2

• 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.

Question 3

Can you set up a provision for reorganisations?

Answer 3

No

Question 4

What is a provision?

Answer 4

A liability of uncertain timing or amount

Question 5

What are the three criteria for recognition of a provision?

Answer 5

• 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

Question 6

What are the two types of present obligation as a result of a past event?

Answer 6

(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.

Question 7

Is an intention to make a payment enough on its own to justify a
provision?

Answer 7

No, there must be an actual obligation to make a payment.

Question 8

What do we record if the likelihood is

a) Possible
b) Probable

Answer 8

a) Contingent liability

b) Provision

Question 9

What do we do with contingent liabilities?

Answer 9

Disclose in notes?

Question 10

What do we do with the below probabilities with outflows?

a) Virtually certain
b) Probable
c) Possible
D) Remote

Answer 10

a) Recognise probability
b) Recognise provision
c) Disclose contingent liability (Notes)
d) Ignore

Question 11

What do we do with the below probabilities with inflows?

a) Virtually certain
b) Probable
c) Possible
D) Remote

Answer 11

a) Recognise asset
b) Disclose contingent asset (Notes)
c) Ignore
d) Ignore

Question 12

How do we recognise a provision?

Answer 12

Dr expense (Admin costs)
Cr Provision (Liability)

Question 13

How do we subsequently recognise a provision?

Answer 13

Dr Expense (Admin costs)
Cr Provision (Liability)

Or decreased

DR Provision
Cr Expense

Question 14

When is a warranty provision required?

And what does this imply?

Answer 14

At the time of sale

So its a past obligation which means an estimate of the obligation needs to be made using expected values.

Question 15

If a company makes a guarantee to pay off a loan on behalf of another entity then how do we record that?

Answer 15

If the guarantee is probable then make a provision otherwise make a contingent liability

Question 16

Do we need a provision for future operating losses/future repairs?

Answer 16

No provision may be made for future operating losses or repairs
because they arise in the future and can be avoided

Question 17

Can a provision be made for restructuring?

Answer 17

A provision may only be made if:

• a detailed, formal and approved plan exists, and
• the plan has been announced to those affected.

Question 18

What should a provision ]made for restructuring include?

Answer 18

The provision should:

 include direct expenditure arising from restructuring
 exclude costs associated with ongoing activities.

Question 19

What are Adjusting events?

Answer 19

Events after the reporting date that provide additional evidence of conditions existing at the reporting date.

Question 20

What are Non-adjusting events?

Answer 20

Events after the reporting date that concern conditions that arose after the reporting date.

Question 21

Give four examples of adjusting events.

Answer 21

• 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.

Question 22

Give three examples of Non - adjusting events.

Answer 22

• 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.

Question 23

How do we account for adjusting events?

Answer 23

Adjustment to the financial statements

Question 24

How do we account for non-adjusting events?

Answer 24

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

Question 25

Are proposed dividends that have not been approved adjusting events?

Answer 25

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.