IAS 37 Flashcards
What are the present obligations as a result of a past event?
Constructive
Legal
When to make a provision?
Present obligation as result of past event
Probable transfer/outflow of economic benefit >50%
Measure the outcome reliably
What does probable mean?
Greater than 50% chance of outflow occurring
Initial measurement of provision?
Best estimate of expenditure
Expected values
Discount to PV if materially different
When should provision be reviewed?
Annually
When should provision only be used for?
Expense originally created
Dismantling cost? Double entry
Debit: PPE
Credit: Provision
Unwinding of interest?
Debit: Finance cost (SPL)
Credit: Provision (SFP)
Growing the provision to its final value
What is a contingent liability?
Possible obligation
Present obligation that can’t be measured or no probable outflow of resources
If I have a contingent liabiltiy?
Disclose the liability
What is a warranty?
A legal obligation
What makes a provision probable?
It has happened in the past
What if something is possible?
A contingent liability
Possible?
Less than 50% of losing the case
What should be disclosed in contingent liability?
Amount
Nature
When to measure as a provision?
Probable chance
Can be measured reliably
How to measure provision for single obligation?
Look for most likely outcome if it is probable
How to measure provision for large population?
Based on expected values of possible outcomes
How is future provision treated in FSs?
Discounted to date of provision in FS
Debit: Expense (SPL)
Credit: Provision
Unwind the discount:
Discounted PV * cost of capital * pro-rata
Debit: FInance cost
Credit: Provision
Discounted to earlier date in FS + Unwind the discount = Total provision
What is unwinding the discount?
Adjusting the present value of future cash flows to reflect their current value
What is done with future operating losses?
No provision can be made for anticipated losses as there is no obligation
No obligation = No provision
What is an onerous contract?
Cost of fulfilling contracts exceeds benefits from the contract
How is a provision recognised for an onerous contract? (PV)
Lower of:
PV of continuing under contract
PV of exiting the contract
Examples of restructuring?
Sale or closure of a line of business
Ceasing activities in a geographical location
Relocating activities
Re-organisation
When is a provision recognised in restructuring?
If a detailed formal plan and the plan has been announced
What does the restructuring provision only include?
Costs that are necessarily incurred and not associated with continuing activities
What is a contingent asset/
Uncertainty about receipt of asset in the future
What is done when an asset is virtually certain?
Recognise an asset
What is done when an asset is probable?
Disclose
What is done when an asset is remote/possible?
Ignore
Are unrecoverable legal costs a provison?
Yes, as they will happen
When are costs capitalised?
Acquire, produce or improve an asset
Estimation for a single obligation point of action?
Most likely settlement provided in FSs. Others discarded
Calculating a provision for FSs?
Discount to PV, then unwind discount
Amount in SFP: Discounted amount + discount
Example of contingent asset?
Inventory that was stolen
Difference between contingent asset and liability
Potential future assets vs. potential future obligations
What is a constructive obligation?
An obligation that arises from an entity’s past actions
What is a legal obligation?
An obligation that arises from a contract
