Chapter 12 - Provisions and Contingencies

Question 0

DOUBLE ENTRY

SET UP A PROVISION

Answer 0

DR  Expense (I/S)
CR  Provision (SFP)

Question 1

WHEN SHOULD A PROVISION BE RECOGNISED?

Answer 1

A provision should be recognised when:

• an entity has a present obligation as a result of a past event
• probable outflow of economic benefit to settle obligation
• reliable estimate of obligation can be made

Question 2

DOUBLE ENTRY

CHANGE IN PROVISION: DERECOGNISED

Answer 2

If a provision no longer meets the recognition criteria it should be derecognised.

DR  Provision (SFP)
CR  Income statement

Question 3

DOUBLE ENTRY

CHANGE IN PROVISION: INCREASE

Answer 3

DR  Expense (I/S)
CR  Provision (SFP)

Question 4

DOUBLE ENTY

CHANGE IN PROVISION: DECREASE

Answer 4

DR  Provision
CR  Expense (I/S)

Question 5

WHAT IS THE TREATMENT FOR ONEROUS CONTRACTS AND PROVISIONS?

Answer 5

An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

• a provision for the cost should be recognised as an expense in the I/S in the period where the contract becomes onerous.
• in subsequent periods, this provision will be reduced by the payments made.

Question 6

WHAT IS THE TREATMENT FOR RESTRUCTURING AND PROVISIONS?

Answer 6

A provision may only be made if:

• a detailed, formal and approved plan exists
• the plan has been announced to those affected

The provision should:

• include direct expenditure
• exclude costs associated with ongoing activities

Question 7

PROVISIONS DISCLOSURE

Answer 7

Court case   |   Warranty   |   Total
B/f
Income statement
Utilised in the year
C/f

Question 8

WHAT IS THE TREATMENT FOR UNCERTAIN LIABILITIES?

REMOTE, POSSIBLE, PROBABLE AND VIRTUALLY CERTAIN

Answer 8

REMOTE (very unlikely) = ignore

POSSIBLE (unlikely) = disclose a contingent liability

PROBABLE (>50%) = provision

VIRTUALLY CERTAIN (100%) = recognise

Question 9

WHAT IS THE TREATMENT FOR UNCERTAIN ASSETS?

REMOTE, POSSIBLE, PROBABLE AND VIRTUALLY CERTAIN

Answer 9

REMOTE (very unlikely) = ignore

POSSIBLE (unlikely) = ignore

PROBABLE (>50%) = disclose a contingent asset

VIRTUALLY CERTAIN (100%) = recognise