Chapter 14 - Provisions Flashcards
What is a provision?
Liability with uncertain timing/amount
What is the recognition criteria for a provision?
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
How to workout provision for single obligaton?
Most likely
How to workout provision for large population of items?
Expected value method
What is the accounting entry to CREATE provision?
Dr expense
Cr provision
What is the accounting entry to USE provision?
Dr provision
Cr cash
difference (p or l)
Can you have a provision for disposal of assets?
No
Can you have a provision for future operating losses?
No
Happen in future
What is an onerous contract?
unavoidable costs
lower of cost to fulfill contract
any compensation/penalty from failing to fulfill it
Can you have a provision for an onerous contract?
Yes
Can you have a provision for restructuring?
only if:
- detailed / formal / approved plan exists
- plan announced to those affected (employees)
What should the restructuring provision include?
- Direct expenditure - YES
* Costs with ongoing activities - NO
If restructuring, can redundancy costs be part of the provision?
Yes, direct expenditure
If restructuring, can staff retraining costs be part of the provision?
No, ongoing
What is the accounting entry for dismantling provision?
Dr PPE
Cr provision
How do you deal with dismantling provision?
Discount cost to present value
Capitalise (brings to present location/condition)
REMEMBER TO DEPRECIATE IT
What should the provision disclosure include?
brief description of nature and timing
any uncertainties
any reimbursement
What is the treatment of UNCERTAIN liabilities?
Remote = ignore
Possible ( < 50%) = Disclose as contingent
Probable ( > 50% ) = Provide
What should you DISCLOSE if a CONTINGENT liability?
brief description of nature
estimate financial effect
any uncertainties about amount/timing
possibility of reimbursement
What is the treatment of UNCERTAIN asset?
Remote = ignore
Possible = ignore
Probable = Disclose as contingent
Virtually certain = Recognise
What is the double entry to record a virtually certain asset?
Dr receivable
Cr other income
When can you recognise a reimbursement?
Reimbursement = Virtually certain
Claim = probable
You can only use provision for the expense it was originally created for.
TRUE/FALSE
TRUE
