F2 - C6 - IAS 37 Provisions and Contingencies Flashcards
Define a provision
A liability of uncertain timing or amount
Define a liability
A present obligation of the netity arising from past events, the settlement of which is expected to result in an outflow from the entity
What 3 things are required to recognise a provision?
Present obligation of the entity arising from past events
Settlement is expected to result in an outflow
Timing or amount is uncertain
How do you measure the value of the provision?
Best estimate based on:
Risk and uncertainty - Variations due to risks and uncertainties should be accounted for
Present value - Take into account future time value of money
Future events - Only those expected to impact the provision
Expected disposal of assets - Gains shouldn’t be accounted for
Name 5 potential examples of provisions
Onerous contracts
Decommissioning costs
Proposed dividends
Restructuring
Future operating losses
Treatment of onerous contracts
The provision should be the lesser of the cost of fulfilling the contract and any penalties for not completing the contract
Treatment of decommissioning costs
Capitalised and expensed over the life of the asset
Should be based on the present value of the expected decommissioning costs
Treatment of proposed dividends
Not acceptable to include dividends declared after the statement of financial position date as liabilities
If declared before year end they must be shown in the statement of changes in equity and accrued for as a liability
Treatment of restructuring
Can be recognised if:
There is a formal and detailed plan for the restructure
A valid expectation has been created among those impacted
Treatment of future operating losses
A provision will never be recognised for losses
Define a contingent liability
A contingent liability is a possible obligation arising from past events, but will only be realised based on certain future events that are not yet certain
How to account for a contingent liability
Not recognised in the statements but disclosed in the notes
3 elements of a contingent liability
Uncertainty - dependent on another event
Improbable - not recognised if as provision if it is not probable
Lack of reliable method measurement
Define a contingent asset
A possible asset arising from past events who existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events outside the control of the entity
Disclosures required
Description of nature of contingent liability / asset
Estimate of its financial effect
Indication of uncertainties relating to amount or timing of outflow / inflow
Possibility of reimbursement for contingent liabilities
