Chapter 15 - IAS 37 and IAS 10

Question 1

What is a provision?

Answer 1

a liability of uncertain timing or amount

Question 2

What is a liability?

Answer 2

A present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Question 3

What does a legal obligation arise from?

Answer 3

contract or legislation

Question 4

What does a constructive obligation arise from?

Answer 4

when an entity’s past practices or published policies create a valid expectation that the entity will discharge certain responsibilities, regardless of whether there is a legal requirement to do so

Question 5

According to IAS 37 a provision is recognised when?

Answer 5

• there is a present obligation from a past event
• there is a probable outflow of economic benefits
• the probable outflow can be measured reliably.

Question 6

What is the double entry for a provision?

Answer 6

Dr Profit or Loss
Cr Provisions (SFP)

Question 7

Provisions should be measured at what?

Answer 7

the best estimate of the expenditure required to settle the obligation as at the reporting date

Question 8

The best estimate of a provision will be?

Answer 8

for a single obligation: the most likely amount payable
for a large population of items: an expected value

Question 9

When should a provision be discounted to present value?

Answer 9

If the effect of the time value of money is material

Question 10

Once a provision is settled what is the double entry?

Answer 10

Dr Provision (SFP)
Cr bank (SFP)

Question 11

What is the double entry to increase a provision?

Answer 11

Dr Expense (SPL)
Cr Provisions (SFP)

Question 12

What is the double entry to decrease a provision?

Answer 12

Dr Provision (SFP)
Cr Expense (SPL)

Question 13

If a provision relates to a single event, such as the outcome from a court case, how should this be measured?

Answer 13

• using the most likely outcome

Question 14

If a provision is made up of numerous events, such as a provision for a warranty to repair goods within one year of sale, how should it be measured?

Answer 14

using expected values

Question 15

What obligation does an entity has to recognise a provision for a future operating loss and why?

Answer 15

no obligation, because they arise in the future and no obligation to incur them has arisen

Question 16

What is a onerous contract?

Answer 16

a contract where the unavoidable costs of meeting the contract’s obligations exceed the economic benefits expected to be received under it. In other words the contract will be loss- making

Question 17

What provision should be recognised for a onerous contract?

Answer 17

Lower of:
- the cost of fulfilling the contract
- the cost of terminating the contract

Question 18

What is a restructuring programme?

Answer 18

A programme that is planned and controlled by management

Question 19

An obligation to restructure a business exists if what?

Answer 19

• there is an approved detailed plan
• employees affected are aware of the plan

Question 20

If an obligation exists for a restructure, a provision should be recognised for what?

Answer 20

direct costs of the restructure, and not for any costs of the ongoing business

Question 21

When will a provision for a future environmental clean-up costs be made?

Answer 21

if there is a legal or constructive obligation to carry out the work and the environmental damage (which will need rectifying in the future) has already occured.

Question 22

What would the costs be for the provision of environmental provisions?

Answer 22

Costs incurred in the future should be discounted to their present value using pre-tax market rate (given)

Question 23

What are contingent liabilities?

Answer 23

• a possible obligation whose existence will be confirmed by future events not controled by the entity or,
• a present obligation where an outflow of economic benefits is not probable, or
• a present obligations where the outflow of economic benefits cannot be measured

Question 24

How are contingent liabilities shown?

Answer 24

no provision made, instead disclosed in a note to the financial statements.

Question 25

If the probability of an economic outflow is remote then how is this outflow recognised?

Answer 25

ignored

Question 26

What is a contingent asset?

Answer 26

assets whose existence will only be confirmed by future events not controlled by the entity

Question 27

Where are contingent assets disclosed?

Answer 27

in the financial statements if the probability of an economic inflow is probable. if less than probable then ignored

Question 28

What is an event after the reporting period?

Answer 28

one in which occurs between the reporting date and the date when the financial statements are authorised for issue.

Question 29

What are adjusting events?

Answer 29

Reflects a condition that was present at year end

Question 30

What is the double entry for an adjustment for an event after the reporting period?

Answer 30

Dr irrecoverable debt expense
Cr Receivables

Question 31

What are non-adjusting events?

Answer 31

do not reflect a condition that was present at year end

Question 32

What is an example of a non-adjusting event?

Answer 32

A fire in the company’s warehouse after the company year end

Question 33

What should be provided for a non-adjusting event?

Answer 33

if material disclose in a note, description and monetary impact

Question 34

When would a non-adjusting event become an adjusting event?

Answer 34

If going concern assumption no longer valid

Question 35

What is an example of a non-adjusting event become an adjusting event?

Answer 35

If large company fire and no insurance