C5 - Accounting For Liabilities Flashcards
IAS 12 - income taxes
Definition
Sets out the treatment for taxes on income such as corporation tax paid by UK companies based on profits.
IAS 12 - income taxes
When does most larger companies pay their tax?
Every 3 months when it’s due with some amounts due to be paid in the current accounting period and some due the following period.
IAS 12 - income taxes
What is current tax
The amount of income taxes payable in respect of the taxable profit for the year
IAS 12 - income taxes
How is underpaid tax recognised on BS
Current liability
IAS 12 - income taxes
How is overpaid tax recognises on BS
Excess is recorded as an asset
IAS 12 - income taxes
How to calculate profit for the year with estimated tax
Profit before tax - tax liability estimation = profit for the year
This is used in the equity on BS
IAS 37 - provisions, contingent liabilities and contingent assets
Definition
Represents uncertainties that may have an effect on future FS
IAS 37 - provisions, contingent liabilities and contingent assets
What is a provision
A liability of certain timing or amount
More than 50% chance of happening
IAS 37 - provisions, contingent liabilities and contingent assets
What is a liability
A present obligation as a result of past events where settlement is expected to result in an outflow of economic benefits
IAS 37 - provisions, contingent liabilities and contingent assets
Obligating event meaning
An event that creates a legal or constructive obligation resulting in an entity having no realistic alternative to settle the obligation.
IAS 37 - provisions, contingent liabilities and contingent assets
Legal obligation - provisions
Obtain something from a contract, legislation or other law
IAS 37 - provisions, contingent liabilities and contingent assets
Constructive obligation - provisions
An entities actions such as an established pattern of past practice
IAS 37 - provisions, contingent liabilities and contingent assets
Provision is to recognised as a liability on BS when..
- present obligation as a result of past events
- probable an outflow of benefits will be required to settle obligation
- reliably measured
IAS 37 - provisions, contingent liabilities and contingent assets
Difference between provisions and liabilities
- provisions have uncertainty as to the timing or amount to be paid
- liabilities we are certain how much will be paid as we’ve had the goods, received invoices and know payment dates
IAS 37 - provisions, contingent liabilities and contingent assets
How provisions are recorded on FS
Change in provision is shown expense on P&L
Total provision is shown long term liability on BS
IAS 37 - provisions, contingent liabilities and contingent assets
What is a contingent liability
A potential liability that may occur depending on the outcome of an uncertain future event.
Less than 50% chance of it happening (possible only)
IAS 37 - provisions, contingent liabilities and contingent assets
Contingent assets meaning
Disclosed only where an inflow of economic benefits is probable (more than 50%)
IAS 37 - provisions, contingent liabilities and contingent assets
Should disclosure be made if the asset is possible or remote?
No!
IAS 37 - provisions, contingent liabilities and contingent assets
Provisions check list
Probable / Present obligation - liability Company lose legal case Reliably measured How it’s recorded in FS Notes on FS
IAS 37 - provisions, contingent liabilities and contingent assets
Contingent liabilities check list
Is it possible or remote obligation
Will not be recorded on FS
No transfer of economic benefits
IAS 10 - events after the reporting period
Definition
Favourable and unfavourable events that take place after the financial statements have been prepared at the year end but before they are authorised and released to third parties
IAS 10 - events after the reporting period
Once FS have been authorised and released to third parties, can FS be altered?
No too late
IAS 10 - events after the reporting period
Two types of events
Adjusting events
Non adjusting events
IAS 10 - events after the reporting period
Adjustment events meaning
This provides material evidence of conditions that existed at the end of the accounting period.
IAS 10 - events after the reporting period
Examples of adjusting events
- impairment of asset
- inventories where NRV falls below cost
- customer becomes insolvent
- discovery of fraud or errors that are incorrect
- court case settlement confirm present obligation existed at year end
IAS 10 - events after the reporting period
Meaning of non adjusting events
Conditions that arose after the year end of the reporting period. No adjustments to be made in FS but disclosed in notes
IAS 10 - events after the reporting period
Non adjusting event examples
- discontinuing major part of business
- major purchase of asset
- fires, floods or strikes
- changes in tax rates
- major reconstruction
IAS 10 - events after the reporting period
How are dividends recognised on FS after reporting period
Non adjusting event disclosed in notes and not treated as a liability
IAS 18 - revenue
Definition
This treatment ensures that revenue shown in P or L is stated correctly.
IAS 18 - revenue
Definition of revenue itself
The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity.
IAS 18 - revenue
How is revenue measured?
At fair value of the consideration received or receivable.
IAS 18 - revenue
3 types of revenue
- Sale of goods
- Rendering of services
- Interest, royalties and dividends
IAS 18 - revenue
Definition of sale of goods
Revenue from sale of goods is recognised when
seller has transferred risks and rewards to buyer
seller has no continuing involvement in goods
revenue can me measured
IAS 18 - revenue
Rendering of services definition
Revenue is to be recognised by reference to the stage of completion.
Revenue can be measured reliably
Economic benefits will flow to seller
Stage of completion can be measured reliably
IAS 18 - revenue
Interest, royalties and dividends
Interest - revenue is recognised using time basis to calculate interest
Royalties - revenue is recognised on an accruals basis according to agreement
Dividends - revenue is recognised when shareholders rights to receive payment is established
