Ch. 12 - quiz Flashcards
The amount of an obligation must be known in advance to be considered a liability
True or False
False
A company has to recognise a provision if it has a present obligation as a result of a past event, it is possible that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
True or False
False
The best estimate of the expenditure required to settle a present obligation is the amount that a company would rationally pay to settle the obligation at the end of the reporting period or to transfer the obligation to a third party at that time.
True or False
True
If the provision being measured involves a large population of items and there is a continuous range of possible outcomes and each point in that range is as likely as any other, the mid-point of the range is used to measure the provision.
True or False
True
Risks and uncertainties are reported in the management report. In the balance sheet and in the income statement, companies only report numbers that are free from material risks and uncertainties.
True or False
False
A contingent liability that has a remote chance of occurrence should be disclosed in the financial statement footnotes
True or False
False
A provision has to be reversed if it is possible that an outflow of resources embodying economic benefits will not be required to settle the obligation any more.
True or False
False
Indicate whether a company has a present obligation as a result of a past event (Yes or No)
Waste from a company’s production process contaminated the groundwater …. The company is not required by law to restore the contaminated environment. However, the company made a public announcement that it would restore the contaminated environment within the next 12 months.
Yes.
The company has a present obligation as a result of a past event (the contamination). Even though there is no legal obligation to restore the environment, the company created a constructive obligation by making a public announcement to restore the environment
Indicate whether a company has a present obligation as a result of a past event (Yes or No)
The management board of a company decided to close down a subsidiary. The decision has not been communicated to any of those affected by the decision so far. No other steps have been undertaken to implement the decision.
No.
Until the decision is communicated or other steps are undertaken, the obligation is not constructive or legal, and therefore no present obligation exists.
Indicate whether a company has a present obligation as a result of a past event (Yes or No)
The management board of a company decided to close a division manufacturing a particular product. A detailed plan for closing the division was agreed by the board, letters were sent to the customers warning them to seek an alternative source of supply, and notices were sent to the staff of the division informing them about the details of the closure plan.
Yes.
In this case, the company has a present obligation as a result of a past event. The decision to close the division, along with the specific actions taken (such as informing staff and customers), creates a constructive obligation.
Indicate whether a company has a present obligation as a result of a past event (Yes or No)
A retail store has a policy of refunding purchases by dissatisfied customers, even though there is no legal obligation to do so. The refund policy of the retail store is generally known.
Yes.
The policy is generally known, which means customers expect the store to provide refunds. This expectation establishes a constructive obligation to offer refunds.
A provision for a single obligation is measured at an amount that…
A. reflects the weighting of all possible outcomes by their probabilities of occurrence
B. is determined as the individual most likely outcome
C. is determined as the individual most likely outcome adjusted to take account of the effect of other possible outcomes
D. none of the above
C
Which of the following statements best describes contingent liabilities in accordance with IAS 37?
A. A contingent liability is a possible obligation that arises from future events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the company.
B. A contingent liability is a probable obligation that arises from future events and whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events wholly within the control of the company.
C. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the company.
D. A contingent liability is a possible obligation that arises from past events but is not recognised because it is not virtually certain that an outflow of resources embodying economic benefits will be required to settle the obligation.
C
Company A takes legal action against its competitor, company B, for patent infringement relating to a patent that was granted to company A on one of its products.
The outcome of the case is uncertain. However, it is probable that the court will order company B to pay compensation for the damages to company A.
How does company A account for that?
A. Company A has to recognise an asset in its balance sheet.
B. Company A has to disclose a contingent asset in the notes to its financial statements.
C. Company A does not have to disclose a contingent asset in the notes to its financial statements.
D. None of the above
B
Company C operates an open-cast mine in a country where environmental restoration laws require that all mine shafts deeper than 10 meters have to be entirely filled in by 31 December 2033; otherwise the mining company will be required to pay a fine.
Company C will be able to extract significant quantities of ore for at least 20 years. The ore is located 15 meters below the surface. On 31 December 2014 the company has not started mining yet. On 31 December 2015 the company has sunk a shaft 5 meters deep.
On 31 December 2016 the company has sunk a shaft 12 meters deep. Which of the following statements is correct?
A. On 31 December 2015 the company recognises a provision for environmental restoration because it is highly likely that the company will mine beyond 10 meters in the future and therefore will be obliged to fill in the shaft by the end of 2016.
B. On 31 December 2015 the company does not recognise a provision for environmental restoration because the shaft is less than 10 meters deep and the company can avoid both the cost of filling the shaft and the fine by abandoning the mining operation before it has dug shafts 10 meters deep.
C. On 31 December 2016 the company does not recognise a provision for environmental liabilities because the company might have realistic alternatives to filling the shaft or paying the fine although the shaft is more than 10 meters deep.
D. None of the above.
B
