Chapter 12 (Provisions and events after the reporting period)

Question 1

How is a provision defined?

Answer 1

As “a liability of uncertain timing or amount”

A provision is a kind of liability and the only difference between a provision and any other liability is the degree of uncertainty involved

Question 2

What is an obligating event and why is it important in calculating a provision?

Answer 2

When it can be no realistic alternative to settle, and without the event there cannot be a
provision

For a past event to be an obligating event, the business entity involved must have no realistic alternative but to settle the obligation created by the event

Question 3

How will the calculation of the provision be affected, if it is long-term?

Answer 3

It should be calculated as the present value of the expenditure

If the effect of the time value of money is material, the amount of a provision should be calculated as the present value of the expenditure required to settle the obligation

Question 4

How will the accounting be affected if it is no longer probable that an outflow of
economic benefits will be required to settle the obligation?

Answer 4

It should be reversed

If it is no longer probable that an outflow of economic benefits will be required to settle an obligation, the related provision should be reversed

Question 5

What is an onerous contract?

Answer 5

A contract in which the cost of meeting the obligation is greater than the benefits.

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”

Question 6

What should a provision for restructuring costs include?

Answer 6

The direct costs arising from the restructuring

A provision for restructuring costs should include only the direct costs arising from the restructuring. These costs must be necessarily incurred and must not be associated with the ongoing activities of the entity

Question 7

There are two ways to define a contingent liability. Describe the definition of a
possible obligation and where it is presented in the financial reports

Answer 7

A possible obligation, confirmed by uncertain future events not within control of the company. & In the notes

A possible obligation is an 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 entity

IAS37 requires that contingent liabilities should not be recognised in the statement of financial position but should instead be disclosed in the notes, unless the possibility of an outflow of economic benefits is remote