F2 - 9. Provisions & Deferred Taxation Flashcards
What is a provision?
A liability of a future obligation of uncertain timing or amount
What are the 3 criteria that must be met in order to make a provision?
- The entity has a present obligation as a result of a past event
- It is probable that an outflow of economic resources will be required to settle the obligation
- A reliable estimate can be made of the amount
What happens if a provision changes between periods?
The change is taken to the P&L
What is an obligating event?
A past event which leads to a present obligation, with no realistic alternative
When is a past event assumed to give rise to a present obligation?
When it is more likely than not that a present obligation exists
What is a legal obligation?
One that derives from a contract, legislation or other operation of low
What is a constructive obligation?
One that derives from an entity’s actions, established pattern of past practise, published policies or a specific statement, such that the entity has indicated to other parties that it will accept certain responsibilities - created a Valid Expectation
What are the 3 most common specific types of provision?
- Restructring
- Warranty
- Decomissioning
What are the 2 conditions that an organisation must meet so that it can provision for restructuring costs?
- There is a detailed plan for restructuring
2. A valid expectation has been created with those affected
What provision should be made for a warranty?
The best estimate of repair costs
What are decommissioning provisions?
Where there is an (often legal) obligation to repair or remove at the end of a project/asset use
What is the special treatment of decommissioning provisions if they relate to a non current asset?
Included as part of the asset cost
Can you provide for future operating losses?
No
What is an onerous contract?
One where the unavoidable costs of meeting the obligations exceed the economic benefits expected
Where there is an onerous contract, what should be provisioned for?
The lower of the net costs of fulfilling the contract and any penalties payable as a result of exiting from it
What 2 things can a contingent liability be?
- A possible obligation from past events (need confirmation)
- A present obligation that is either not probable or cannot be measured reliably
How do we treat contingent liabilities?
Disclosure in the notes
What is a contingent asset?
- A possible asset
- arising from past events
- whose existence will only be confirmed by the occurrence of one or more uncertain future events
- not wholly within the control of the entity
How do we treat contingent assets?
Disclosure in the notes
When do contingent assets get transferred onto the SFP?
When their existence is virtually certain
What is current tax (IAS12)?
The amount of income tax payable by a company in respect of its taxable profit or loss for a period
How is current tax worked out?
Company estimates
What is the double entry for current tax?
Dr Income Tax Expense (P&L)
Cr Income Tax Liability (SFP)
What happens if there has been an under or over provision for current tax?
Adjusted for in the next accounting period
What is deferred tax?
An accounting adjustment which matches recorded accounting transactions with the related tax effect where these occur in different periods
Why does deferred tax arise?
Temporary differences between the carrying amount of an asset/liability in the SFP and its tax base
What is a taxable temporary difference, and what does it arise in?
When NBV > tax base, resulting in a deferred tax provision
What is a deductible temporary difference, and what does it arise in?
When tax base > NBV, resulting in a deferred tax asset
What are the 3 most common causes of temporary differences?
- When an assets NBV is not equal to its tax base
- When expenses are accrued in the P&L but are not allowable for taxation until expenses are actually paid
- When income is recognised in the P&L but is not taxed until actually received
When should a deferred tax liability be recognised on revaluation gains?
Always - even if management do not intent to sell the asset
What is the double entry for tax provision on revaluation gains?
DR Reval Surplus
Cr Deferred Tax Provision
When can a deferred tax asset be recognised for tax losses?
To the extent that they are considered recoverable against future profits
