F2 - 9. Provisions & Deferred Taxation

Question 1

What is a provision?

Answer 1

A liability of a future obligation of uncertain timing or amount

Question 2

What are the 3 criteria that must be met in order to make a provision?

Answer 2

1. The entity has a present obligation as a result of a past event
2. It is probable that an outflow of economic resources will be required to settle the obligation
3. A reliable estimate can be made of the amount

Question 3

What happens if a provision changes between periods?

Answer 3

The change is taken to the P&L

Question 4

What is an obligating event?

Answer 4

A past event which leads to a present obligation, with no realistic alternative

Question 5

When is a past event assumed to give rise to a present obligation?

Answer 5

When it is more likely than not that a present obligation exists

Question 6

What is a legal obligation?

Answer 6

One that derives from a contract, legislation or other operation of low

Question 7

What is a constructive obligation?

Answer 7

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

Question 8

What are the 3 most common specific types of provision?

Answer 8

1. Restructring
2. Warranty
3. Decomissioning

Question 9

What are the 2 conditions that an organisation must meet so that it can provision for restructuring costs?

Answer 9

1. There is a detailed plan for restructuring

2. A valid expectation has been created with those affected

Question 10

What provision should be made for a warranty?

Answer 10

The best estimate of repair costs

Question 11

What are decommissioning provisions?

Answer 11

Where there is an (often legal) obligation to repair or remove at the end of a project/asset use

Question 12

What is the special treatment of decommissioning provisions if they relate to a non current asset?

Answer 12

Included as part of the asset cost

Question 13

Can you provide for future operating losses?

Answer 13

No

Question 14

What is an onerous contract?

Answer 14

One where the unavoidable costs of meeting the obligations exceed the economic benefits expected

Question 15

Where there is an onerous contract, what should be provisioned for?

Answer 15

The lower of the net costs of fulfilling the contract and any penalties payable as a result of exiting from it

Question 16

What 2 things can a contingent liability be?

Answer 16

1. A possible obligation from past events (need confirmation)
2. A present obligation that is either not probable or cannot be measured reliably

Question 17

How do we treat contingent liabilities?

Answer 17

Disclosure in the notes

Question 18

What is a contingent asset?

Answer 18

• 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

Question 19

How do we treat contingent assets?

Answer 19

Disclosure in the notes

Question 20

When do contingent assets get transferred onto the SFP?

Answer 20

When their existence is virtually certain

Question 21

What is current tax (IAS12)?

Answer 21

The amount of income tax payable by a company in respect of its taxable profit or loss for a period

Question 22

How is current tax worked out?

Answer 22

Company estimates

Question 23

What is the double entry for current tax?

Answer 23

Dr Income Tax Expense (P&L)

Cr Income Tax Liability (SFP)

Question 24

What happens if there has been an under or over provision for current tax?

Answer 24

Adjusted for in the next accounting period

Question 25

What is deferred tax?

Answer 25

An accounting adjustment which matches recorded accounting transactions with the related tax effect where these occur in different periods

Question 26

Why does deferred tax arise?

Answer 26

Temporary differences between the carrying amount of an asset/liability in the SFP and its tax base

Question 27

What is a taxable temporary difference, and what does it arise in?

Answer 27

When NBV > tax base, resulting in a deferred tax provision

Question 28

What is a deductible temporary difference, and what does it arise in?

Answer 28

When tax base > NBV, resulting in a deferred tax asset

Question 29

What are the 3 most common causes of temporary differences?

Answer 29

1. When an assets NBV is not equal to its tax base
2. When expenses are accrued in the P&L but are not allowable for taxation until expenses are actually paid
3. When income is recognised in the P&L but is not taxed until actually received

Question 30

When should a deferred tax liability be recognised on revaluation gains?

Answer 30

Always - even if management do not intent to sell the asset

Question 31

What is the double entry for tax provision on revaluation gains?

Answer 31

DR Reval Surplus

Cr Deferred Tax Provision

Question 32

When can a deferred tax asset be recognised for tax losses?

Answer 32

To the extent that they are considered recoverable against future profits