Chapter 5: Accounting for liabilities and the statement of profit or loss Flashcards
liability
A liability is 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.
ACCOUNTING FOR LIABILITIES: when is recognise on the SFP?
In order to be recognised on the statement of financial position, liabilities must be capable of being reliably measured. If the liability cannot be reliably measured then it will often be disclosed in the notes to the accounts.
IAS 12 - INCOME TAXES
Current tax
This is the amount of income taxes payable in respect of the taxable profit for the year.
IAS 12 - INCOME TAXES
Current tax - Accounting:
1) tax expense for the year
2) unpaid current tax
3) overpaid tax
The tax expense for the year, from the ordinary activities of the entity, is recognised on the face of the statement of profit or loss and other comprehensive income.
The amount of unpaid current tax is recognised as a liability on the statement of financial position, under the heading of current liabilities.
When an entity has overpaid tax, then the excess amount is recognised as an asset, under the heading of current assets.
Estimates of tax
When the business makes an estimate of tax it is likely that the estimate will differ from the actual liability. As a consequence, an adjustment will need to be made in the financial statements of the next accounting period.
LIABILITIES SIDE OF STATEMENT OF FINANCIAL POSITION
IAS 37 – Provisions, contingent liabilities and contingent assets: definition and accounting in general
These three items represent uncertainties that may have an effect on future financial statements. They need to be accounted for consistently so that users can have a fuller understanding of their effect on financial statements.
provision
A provision is a liability of uncertain timing or amount.
obligating event
An obligating event is an event that creates a legal or constructive obligation resulting in an entity having no realistic alternative to settling the obligation.
legal obligation
A legal obligation derives from a contract, legislation, or other operation of law.
constructive obligation
A constructive obligation derives from an entity’s actions such as an established pattern of past practice, or where the entity has created a valid expectation.
A provision is to be recognised as a liability in the financial statements when:
1) An entity has a present obligation as a result of a past event.
2) It is probable that an outflow of economic benefits will be required to settle the obligation.
3) A reliable estimate can be made of the amount of the obligation.
Unless all of these conditions are met, no provision should be recognised.
Probable means more likely to occur than not, a more than 50% likelihood of its occurrence.
Accounting for provisions
The amount of the change in the provision is recognised as an expense in the statement of profit or loss and other comprehensive income, and the total amount of the provision is shown as a liability on the statement of financial position.
contingent liability:
A contingent liability is:
1) Either a possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control.
2) Or a present obligation that arises from past events but is not recognised because:
/=/ 1) Either it is not probable that an outflow of economic
benefits will be required to settle the obligation.
/=/ 2) Or the obligation cannot be measured with
sufficient reliability.
Accounting for contingent liabilities
A contingent liability is a possible obligation, less than 50% likelihood of its occurrence.
A contingent liability is not recognised in the financial statements; however it should be disclosed as a note to the statements.
Where a contingent liability is considered to be remote, then no disclosure is required in the notes to the statements.
Contingent assets
A contingent asset is a possible asset arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity’s control.
