9. Provisions and Deferred Taxation

Question 1

What is a provision?

Answer 1

A liability of uncertain timing or amount

Question 2

What are the 3 criteria that must all be met for a provision to be recognised?

Answer 2

1. Present obligation as a result of a past event
2. Probable that an outcome of economic resources will be required
3. A reliable estimate can be made

Question 3

Where is the change in provision from year to year recorded?

Answer 3

In the P&L

Question 4

What are the two types of obligation a company may have to record a provision for?

Answer 4

Legal or Constructive

Question 5

What are the 2 conditions that restructuring must meet in order to be provided for?

Answer 5

Detailed formal plan and expectation has been raised with those affected

Question 6

What are 3 key examples of costs that can be provided for?

Answer 6

1. Restructuring
2. Decomissioning
3. Expected warranty payouts

Question 7

Can you provide for future operating losses?

Answer 7

No

Question 8

What is an onerous contract?

Answer 8

One in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received from it

Question 9

Under an onerous contract, what should the provision be measured at?

Answer 9

The lower of the net cost of fulfilling the contract and penalties payable for withdrawing

Question 10

What is a contingent liability?

Answer 10

Either a possible obligation dependent on future events, one that is not probable or one that amounts cannot be reliably measured for

Question 11

How are contingent liabilities and assets recognised?

Answer 11

In disclosure ONLY

Question 12

What is current tax?

Answer 12

Income tax payable for the period (direct tax)

Question 13

How is current tax recorded?

Answer 13

Dr Income Tax Expense P&L

Cr Income Tax Liability SFP

Question 14

What is deferred tax?

Answer 14

An accounting adjustment which matches recorded accounting transactions which the related tax effects where these occur in different periods

Question 15

What are temporary differences in regards to deferred taxation?

Answer 15

Differences between the carrying amount of an asser or liability in the SFP and its tax base

Question 16

How do you calculate the deferred tax provision?

Answer 16

Difference between Carrying Amount and Tax WDV, multiplied by the tax rate

Question 17

Where is the deferred tax from revaluation gains recorded in the SFP?

Answer 17

Dr Reval Surplus

Cr Deferred Tax Provision

Question 18

What amount goes to the P&L for deferred tax each year?

Answer 18

The difference between the deferred tax liability at the previous year end and at this year end (not including revl deferred tax)