F2B - Chapter 7: Provisions, contingent liabilities and contingent assets Flashcards
What is a provision?
A liability of uncertain timing or amount
What is a liability?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
When can a provision be recognised?
An entity has a present obligation as a result of a past event
It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
A reliable estimate can be made of the amount of the obligation
What are the two types of obligations?
Legal
Constructive
What is a onerous contract?
A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it
A provision is required for the cheapest option of exiting the contract which is the lower of what?
The cost of fulfilling the contract
Any compensation/penalties payable for failing to fulfil the contract
According to IAS 37 what is restructuring?
A programme, planned and controlled by management, that materially changes the scope of business undertaken or the manner in which that business is conducted
When can a provision for restructuring costs be made?
The entity has a detailed formal plan
Has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement it or announcing it
When should a provision be made for costs?
Necessarily entailed by the restructuring
Not associated with the ongoing activities of the entity
What is a contingent liability?
A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
OR
A present obligation that arises from past events but is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation OR the amount of the obligation cannot be measured with sufficient reliability
What is a contingent asset?
possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
According to IAS 37 what would be disclosed for contingent liabilities and assets?
Description of the nature of the contingent liability/asset
An estimate of its financial effect
An indication of the uncertainties relating to the amount or timing of the outflow/inflow
For contingent liabilities, the possibility of any reimbursement
