CHAPTER 4: PROVISION Flashcards
Which is the correct definition of a provision?
a. A possible obligation arising from past event
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
B
A provision shall be recognized as liability when
a. An entity has a present obligation as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
c. The amount of the obligation can be measured reliably.
d. All of these are required for the recognition of a provision as liability.
D
A legal obligation is an obligation that is derived from all of the following, except
a. Legislation
b. A contract
c. Other operation of law
d. An established pattern of past practice
D
An entity has an established pattern of practice or stated policy that has created valid expectation that it will accept certain responsibilities.
a. Constructive obligation
b. Legal obligation
c. Unerous obligation
d. Present obligation
A
It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.
a. Obligating event
b. Past event
c. Subsequent event
d. Current event
A
An outflow of resources embodying economic benefits is regarded as “probable” when
A. The probability that the event will occur is greater than the probability that the event will not occur.
B. The probability that the event will not occur is greater than the probability that the event will occur.
C. The probability that the event will occur is the same as the probability that the event will not occur.
D. The probability that the event will occur is 90% likely.
A. The probability that the event will occur is greater than the probability that the event will not occur.
Where range of possible outcomes, and each point in that range is as likely as any other, the range to be used is
a. Minimum
b. Maximum
c. Midpoint
d. Sum of the minimum and maximum
C
When the provision involves a large population of items, the estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome adjusted for the effect of other possible outcomes.
d. Midpoint of the possible outcomes.
A
When the provision arises from a single obligation, the estimate of the amount
a. Reflects the the weighting of all possible outcomes. b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other possible outcomes.
d. Midpoint of the possible outcomes.
C
The present value in a range of possible outcomes all discounted using the same rate would be
a. The most-likely outcome
b. The maximum outcome
c. The minimum outcome
d. The sum of probability-weighted present value
D
For which of the following should a provision be recognized?
a. Future operating losses
b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs
D
Provisions shall be recognized for all of the following, except
a. Cleaning-up costs of contaminated land when an oil entity has a published policy that it will undertake to clean up all contamination that it causes.
b. Restructuring costs after a binding sale agreement has been signed.
c. Rectification costs relating to defective products sold.
d. Future refurbishment costs due to introduction of a new computer system.
D
An entity is closing one of its operating divisions, and the conditions for making restructuring provision have been met. The closure will happen in the first quarter of the next financial year.
At the current year-end, the entity has announced the formal plan publicly and is calculating the restructuring provision.
Which of the following costs should be included in the restructuring provision?
a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other divisions
c. Contractually required costs of retiring staff being made redundant from the division being closed
d. Future operating losses of the division being closed up to the date of closure
C
An entity operates chemical plants. The published policies include a commitment to making good any damage caused to the environment by the operations. The entity has always honored this commitment. Which of the following scenarios would give rise to an environmental provision?
a. On past experience it is likely that a chemical spill which would result in having to pay fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity’s actions may damage surrounding wildlife.
c. The government has outlined plans for a new law requiring all environmental damage to be rectified.
d. A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife.
D
An entity has been served a legal notice at year-end by the Department of Environment and Natural Resources to fit smoke detectors in its factory on or before middle of next year. The cost of fitting smoke detector can be measured reliably. How should the entity treat this in the financial statements at year-end?
a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one-half only of the estimated amount.
c. No provision is recognized at year-end because there is no present obligation for the future expenditure since the entity can avoid the future expenditure by changing the method of operations but disclosure is required.
d. Ignore the event.
C
