4 - Provision Flashcards
Standard where provisions are based on
PAS 37 - Provisions, Contingent Liabilities and Assets
Liability of uncertain timing or amount
Provision
Provisions differ from other liabilities because of
Uncertainty in timing and amount
Provisions must necessarily be
Estimated
Provisions are presented in?
SOFP separately from other types of liabilities
Provision is recognized when these conditions are met:
- entity has present obligation from past event
- probable that outflow of resources will be required to settle the obligation
- amount of obligation can be reliably estimated
What happens if there is a condition that is not met?
No provision is recognized
Past event that creates a present obligation
Obligating event
Entity doesn’t have any choice but to settle the obligation
Obligating event
Cases where it is an obligating event:
- legal obligation
- constructive obligation
Obligation is legally enforceable
Legal obligation
Entity’s actions created valid expectations from others
Constructive obligation
The only liabilities (provision) recognized in entity’s SOFP are those that exist
at the end of the reporting period.
Whom the obligation is owed
Obligee
Obligation always involve another party but
it is not necessary that identity of obligee is known
Obligee may be
the public at large
“more likely than not”
Probable
If there is a 50:50 equal chances of occurrence and nonoccurrence it is
not considered as a provision because chance is ‘possible’ not ‘probable’
If no reliable estimate is made
no provision is recognized
In the general sense, all provisions are
contingent
But, according to PAS 37, contingent refers to
liabilities & assets not recognized because they do not meet all of the recognition criteria
Provision is
liability of uncertain timing that meets all these conditions:
> present obligation
> probable outflow
> reliably estimated
Contingent liability is
possible obligation whose existence will be confirmed by occurrence or nonoccurrence of future events but:
> present obligation
> no probable outflow
> cannot be reliably estimated
Contingent liabilities are
disclosed only
Possible asset that arises from past events whose existence will be confirmed only by occurrence or nonoccurrence of uncertain future events not (wholly) controlled by entity
Contingent asset
Contingent assets are not recognized. Why?
They do not meet the asset recognition criteria
What happens when you recognize contingent assets?
May result to recognition of income that may never be realized
Contingent assets are disclosed if
inflow of economic benefits is probable
Asset is not a contingent asset if realization of income is
virtually certain; then the asset is appropriately recognized
100% chance of occurrence
Virtually certain
It has less than 50% chance of occurring
Remote
