Chapter 5 Provisions, Contingencies And Events After The Reporting Period

Question 1

Provisions (IAS 37)

Answer 1

A provision is a liability of uncertain timing or amount.

Question 2

Recognition

Answer 2

A provision is recognised when:

1. An entity has a present obligation (legal or constructive) as a result of a past event.
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
3. A reliable estimate can be made of the a,punt of the obligation.

Question 3

Measurement of provisions

Answer 3

1. General rule
   The amount recognised is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
2. Allowing for uncertainties
   Where the provision being measured involves a large population of items, use expected values.

Where a single obligation is being measured, the individual most likely outcome may be the best estimate.

3. Discounting of provisions
   Where the time value of money is material, the provision is discounted. The discount rate should be a pre tax rate and appropriately reflect the risk associated cash flows.
4. Recognising an asset when creating a provision
   An asset can only be recognised where the present obligation recognised as a provision gives access to future economic benefits.

The unwinding of the discount is recognised in profit or loss.

Question 4

Contingent liabilities (IAS 37)

Answer 4

A contingent liability is either:

1. A possible obligation arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity or
2. A present obligation that arises from past events but is not recognised because:
   - it is not probable that an outflow of economic benefit will be required to settle the obligation or
   - the amount of the obligation cannot be measured with sufficient reliability.

Question 5

Disclosure

Answer 5

Contingent liabilities are disclosed unless the possibility of an outflow of economic benefits is remote.

An entity must disclose:-

1. The nature of the contingent liability.
2. An estimate of its financial debt.
3. An indication of the uncertainties relating to the amount or timing of any outflow.
4. The possibility of any refurbishment.

Question 6

Contingent assets (IAS 37)

Answer 6

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed by the occurrence of one or more uncertain future events not wholly within the entity’s control.

Question 7

Specific types of provision

Answer 7

1. Future operating losses
   Not recognised for future operating losses.
2. Onerous contracts
   If an entity has a contract that is onerous, the present obligation under the contract must be recognised and measured as a provision.
3. Restructuring
   A constructive obligation to restructure arises only when an entity:-
   - has a detailed formal plan for the restructuring and
   - has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

A restructuring provision only includes the direct expenditures arising from the restructuring:

• necessarily entailed by the restructuring
• not associated with the ongoing activities of the entity

Question 8

IAS 10: Events after the reporting period

Answer 8

Adjusting event are adjusted in the financial statements as they provide evidence of conditions existing at the end of the reporting period.

Non-adjusting events are disclosed if material, as while important, they do not affect the financial statement figures.
Accordingly
- the nature of the event
- an estimate its financial effect, or statement that such an estimate cannot be made