Chapter 15 - IAS 37 and IAS 10 Flashcards
What is a provision?
a liability of uncertain timing or amount
What is a liability?
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
What does a legal obligation arise from?
contract or legislation
What does a constructive obligation arise from?
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
According to IAS 37 a provision is recognised when?
- there is a present obligation from a past event
- there is a probable outflow of economic benefits
- the probable outflow can be measured reliably.
What is the double entry for a provision?
Dr Profit or Loss
Cr Provisions (SFP)
Provisions should be measured at what?
the best estimate of the expenditure required to settle the obligation as at the reporting date
The best estimate of a provision will be?
for a single obligation: the most likely amount payable
for a large population of items: an expected value
When should a provision be discounted to present value?
If the effect of the time value of money is material
Once a provision is settled what is the double entry?
Dr Provision (SFP)
Cr bank (SFP)
What is the double entry to increase a provision?
Dr Expense (SPL)
Cr Provisions (SFP)
What is the double entry to decrease a provision?
Dr Provision (SFP)
Cr Expense (SPL)
If a provision relates to a single event, such as the outcome from a court case, how should this be measured?
- using the most likely outcome
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?
using expected values
What obligation does an entity has to recognise a provision for a future operating loss and why?
no obligation, because they arise in the future and no obligation to incur them has arisen
What is a onerous contract?
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
What provision should be recognised for a onerous contract?
Lower of:
- the cost of fulfilling the contract
- the cost of terminating the contract
What is a restructuring programme?
A programme that is planned and controlled by management
An obligation to restructure a business exists if what?
- there is an approved detailed plan
- employees affected are aware of the plan
If an obligation exists for a restructure, a provision should be recognised for what?
direct costs of the restructure, and not for any costs of the ongoing business
When will a provision for a future environmental clean-up costs be made?
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.
What would the costs be for the provision of environmental provisions?
Costs incurred in the future should be discounted to their present value using pre-tax market rate (given)
What are contingent liabilities?
- 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
How are contingent liabilities shown?
no provision made, instead disclosed in a note to the financial statements.
If the probability of an economic outflow is remote then how is this outflow recognised?
ignored
What is a contingent asset?
assets whose existence will only be confirmed by future events not controlled by the entity
Where are contingent assets disclosed?
in the financial statements if the probability of an economic inflow is probable. if less than probable then ignored
What is an event after the reporting period?
one in which occurs between the reporting date and the date when the financial statements are authorised for issue.
What are adjusting events?
Reflects a condition that was present at year end
What is the double entry for an adjustment for an event after the reporting period?
Dr irrecoverable debt expense
Cr Receivables
What are non-adjusting events?
do not reflect a condition that was present at year end
What is an example of a non-adjusting event?
A fire in the company’s warehouse after the company year end
What should be provided for a non-adjusting event?
if material disclose in a note, description and monetary impact
When would a non-adjusting event become an adjusting event?
If going concern assumption no longer valid
What is an example of a non-adjusting event become an adjusting event?
If large company fire and no insurance
