5. Provisions, Contingents Flashcards
Define Provision
A liability of uncertain timing or amount
Which accoutnign standard provides guidance on provisions
IAS 37 Provisions, Contingent LIabilities and Contingent Assets
What are the conditions to be recognised for a provision
- Present Obligation as a result of past event
- Probable outflow of economic resources
- Reliable measurement
What makes a past event obligating
No realistic alternative to setle the obligation
- More that 50% chance of it existing
What are the two types of oblifgation
Legal
Constructive
What is a legal obligation
An obligation that derives from:
- Contract
- Legislation
- Other operation of law
What is Constructive obligation
An obligation that derives from an entity’s action
- By established pattern of practice, policies or expectation of responsibilities
- Enity creates a valid expectation that parties will exercise that right
What is the requirement of probable outflow
Outflow is probable if there is a more than 50% chance of paying
What is the accounting entry for provision
Credit Provision in SOFP
Debit expense in SPL
What is accounting entry due to construction or acquisition of non current asset
Debit PPE in SOFP
Credit Provision in SOFP
What is accouting entry for when provision is used
Debit Provision
Credit Cash
Credit/Debit balance in SPL
Define Onerous Contracts
A contract in which the unavoidable costs of meeting the oblifgation under the contract exceed the economic benefits expected to be recieved from it
What is the onerous provision measured of
Lower of
- Net cost of fulfilling the contract
- Compensation or penalties arising from failure to fulfill contract
When are leases be accounted for as onerous
- Becomes onerous before lease commencement date
- Accoutned for under IFRS 16 recognition exemptions and has become onerous
When can provision for restructuring be recognsied
- Only when there is a contructive obligation
- Has a detailed formal plan
- Has raised a valid expectation it will carry out the restructuring
What costs can and cannot be included in provision for restrcuturing
- Direct expenditures arising from restructuring not associated with ongoing activities
Cannot include
- Retraining or relocating staff
- Marketing
- Investment in new systems
When can provision be recognised for decommissioning of PPE
- Obligating event has to occur
- Plants construction: recognise at time of construction debit PPE and credit Provision
- Plants operation: recognise over the period of operation by debiting expense and credit provision
Define contingent liability
Present obligation arisign from past events but not recognised because
- Not probable than an outflow will occur (less than <50%)
- Amount of obligation cannot be reliably measured
How is contingent liability/asset treated
Not recogised in the financial statements
Disclosed as a note in the statements
What should be included in the disclosure
- Brief description of the nature of liability
- Estimate of financial effect
- Indicaion of uncertainties
- Possibility of any reimbursements
Define contingent Asset
Possible asset arising from past events whose existence will only be confirmed by the occurence of uncertain fuure events not within the control of the entity
When can contingent asset be disclosed in statements
If Virtually certain - provision
Probable - disclose contingent asset
Possible or remote - do nothing
