Chapter 5: Provisions & Accruals

Question 1

What are accruals?

Answer 1

Accruals involve recording of expenses that have been incurred but payment for which is yet to be made by the transacting entity.

Accruals are adjustments made to reflect the timing of revenues and expenses, while provisions are recognized for estimated future obligations or losses.

Question 2

What are provisions?

Answer 2

Provisions involve recording of expenses or losses that have not yet been incurred but they may be incurred on the occurrence or non-occurrence of certain events.

Question 3

Asset Retirement Obligations (AROs):

Answer 3

Asset Retirement Obligations (AROs) are a legal/contractual obligations associated with the retirement of a tangible long-lived asset.

Question 4

Additions:

Answer 4

Recognition (or increases) of present uncertain obligations

Question 5

Usage:

Answer 5

Expenditures set against the original provision.

Question 6

Reversal:

Answer 6

It is no longer probable that expenditures will be required to settle an obligation.

Question 7

Constructive obligation:

Answer 7

A constructive obligation is an accounting provision that a company must make as a result of a pattern established in the past, a certain policy approved by the entity that is in the public domain, or a statement made by the management of the entity where the company commits with the third parties to comply with some type of responsibility123.

ex: good practice warranties

Question 8

Contingent liabilities:

Answer 8

A contingent liability is a possible obligation that may arise in future depending on occurrence or non-occurrence of one or more uncertain events12. It is a liability that may occur depending on the outcome of an uncertain future event1. A contingent liability has to be recorded if the contingency is likely and the amount of the liability can be reasonably estimated.

ex: -Financial guarantees
-Possible obligations from legal proceedings
-New regulations

Question 9

Onerous contract:

Answer 9

Loss-making customer contract

Question 10

Constructive obligation:

Answer 10

A constructive obligation is an accounting provision that a company must make as a result of a pattern established in the past, a certain policy approved by the entity that is in the public domain, or a statement made by the management of the entity where the company commits with the third parties to comply with some type of responsibility.