Chapter 14 - Provisions

Question 1

What is a provision?

Answer 1

Liability with uncertain timing/amount

Question 2

What is the recognition criteria for a provision?

Answer 2

All of these need to be met:

• present obligation (legal or constructive) about past event
• probable economic outflow of economic benefits to settle obligation
• reliable estimate of amount

Question 3

How to workout provision for single obligaton?

Answer 3

Most likely

Question 4

How to workout provision for large population of items?

Answer 4

Expected value method

Question 5

What is the accounting entry to CREATE provision?

Answer 5

Dr expense

Cr provision

Question 6

What is the accounting entry to USE provision?

Answer 6

Dr provision
Cr cash

difference (p or l)

Question 7

Can you have a provision for disposal of assets?

Answer 7

No

Question 8

Can you have a provision for future operating losses?

Answer 8

No

Happen in future

Question 9

What is an onerous contract?

Answer 9

unavoidable costs

lower of cost to fulfill contract

any compensation/penalty from failing to fulfill it

Question 10

Can you have a provision for an onerous contract?

Answer 10

Yes

Question 11

Can you have a provision for restructuring?

Answer 11

only if:

• detailed / formal / approved plan exists
• plan announced to those affected (employees)

Question 12

What should the restructuring provision include?

Answer 12

• Direct expenditure - YES

* Costs with ongoing activities - NO

Question 13

If restructuring, can redundancy costs be part of the provision?

Answer 13

Yes, direct expenditure

Question 14

If restructuring, can staff retraining costs be part of the provision?

Answer 14

No, ongoing

Question 15

What is the accounting entry for dismantling provision?

Answer 15

Dr PPE

Cr provision

Question 16

How do you deal with dismantling provision?

Answer 16

Discount cost to present value

Capitalise (brings to present location/condition)

REMEMBER TO DEPRECIATE IT

Question 17

What should the provision disclosure include?

Answer 17

brief description of nature and timing

any uncertainties

any reimbursement

Question 18

What is the treatment of UNCERTAIN liabilities?

Answer 18

Remote = ignore

Possible ( < 50%) = Disclose as contingent

Probable ( > 50% ) = Provide

Question 19

What should you DISCLOSE if a CONTINGENT liability?

Answer 19

brief description of nature

estimate financial effect

any uncertainties about amount/timing

possibility of reimbursement

Question 20

What is the treatment of UNCERTAIN asset?

Answer 20

Remote = ignore

Possible = ignore

Probable = Disclose as contingent

Virtually certain = Recognise

Question 21

What is the double entry to record a virtually certain asset?

Answer 21

Dr receivable

Cr other income

Question 22

When can you recognise a reimbursement?

Answer 22

Reimbursement = Virtually certain

Claim = probable

Question 23

You can only use provision for the expense it was originally created for.

TRUE/FALSE

Answer 23

TRUE