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.
Accounting for Contingent assets
A business should not recognise a contingent asset in its financial statements. However, when the realisation of the profit is virtually certain, then the asset is no longer contingent and its recognition in the statements is appropriate.
IAS 10 - EVENTS AFTER THE REPORTING PERIOD
Events after the reporting period are favourable or unfavourable events that take place after the financial statements have been prepared at the year end and before the time when the statements are authorised for issue to interested parties.
IAS 10 - EVENTS AFTER THE REPORTING PERIOD
Adjusting events
Adjusting events provide evidence of conditions that existed at the end of the reporting period. If material, adjustments should be made to the amounts shown in the financial statements.
IAS 10 - EVENTS AFTER THE REPORTING PERIOD
Non-adjusting events
Non-adjusting events are indicative of conditions that arose after the end of the reporting period. No adjustment is made to the financial statements; instead, if material, they are disclosed by way of notes which explain the nature of the event and, where possible, give an estimate of its financial effect.
IAS 10 - EVENTS AFTER THE REPORTING PERIOD
Dividends
Dividends declared or proposed on ordinary shares after the reporting period are not to be recognised as a liability on the statement of financial position. Instead they are non-adjusting events which are disclosed by way of a note.
IAS 10 - EVENTS AFTER THE REPORTING PERIOD
Going concern
Going concern: an entity cannot prepare its financial statements on a going concern basis if, after the reporting period, management determines either that it intends to liquidate the business or to cease trading, of that there is no realistic alternative to these courses of action.
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS
For which reason an entity should recognise revenue?
An entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Customer
Customer: a party that has contracted to obtain goods or services that are the output of an entity’s ordinary activities in exchange for consideration.
Income
Income: increases in economic benefits during the accounting period in the form of inflows or enhancement of assets or decrease of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
