Ias 37

Question 1

Liabilities

Answer 1

Obligations arising from past events that will lead to an outflow of economic resources

Question 2

Provision

Answer 2

Liability of uncertain timing or amount

Question 3

Ias 37

Answer 3

Provisions , contingent liabilities and contingent assets

Question 4

Provision should be recognized when and only when

Answer 4

1, an entity has a present obligation as part of a past event
2, probable that an outflow of resources embodying economic benefits will be required to settle the obligation
3, a reliable estimate can be made of the amount of the obligation

Question 5

Constructive obligation

Answer 5

Arises when entity’s past practices or published policies creates a valid expectation amongst other parties that it will discharge certain responsibilities

Question 6

Legal obligation

Answer 6

Arises from contracts or from laws and legislations

Question 7

Probable

Answer 7

If it is more likely than not to occur.

Question 8

Measurement of provisions

Answer 8

Best estimate of the expenditure required to settle the obligation to settle the obligation as at the reporting date.

Question 9

Best estimate of a provision

Answer 9

1. Most likely amount payable for a single obligation E.g. case
2. Expected value for a large population of items e.g warranty

Question 10

Subsequent measurements

Answer 10

Unwind discounts and present in finance costs in p/l

Finance cost . Dr
Provision. Cr

Question 11

De recognition

Answer 11

At reporting date provision should be reversed if it is no longer probable that an outflow of economic benefits will be required to settle the obligation

Question 12

Contingent liabilities

Answer 12

1. Possible obligation that arises from past events and whose existence will be confirmed by the outcome of uncertain future events which are outside of the control of the entity
2. Present obligation that arises from past events but does not meet the criteria for recognition as a provision. This because an outflow of economic benefit is not probable or its not possible to make a reliable estimate of the obligation

Question 13

When to disclose contingent liability

Answer 13

All the time unless possibility of future outflow is remote

Question 14

Onerous contract

Answer 14

In which the unavoidable costs of meeting the contract exceed the economic benefits expected to be received under it

Question 15

Accounting for onerous contracts

Answer 15

A provision should be recognized for present obligation under the contract

1. The cost of fulfilling the contract
2. The cost of terminating it and suffering any penalties

Question 16

Assets bought specifically for use in ful filling the onerous contract itself

Answer 16

Should be reviewed for impairment before any separate provision is made for the contract

Question 17

Provision can’t be recognized for future repairs or replacement parts

Answer 17

Because there is no current obligation to incur the expense - even if the future expenditure is required by law the entity could avoid it by selling the asset

Question 18

Environmental provisions

Answer 18

Referred to as clean up cost

Usually relate to cost of decontamination and restoration of an industrial site after production process has ceased

Question 19

When to create environmental provision

Answer 19

Only when a past event has created an obligation to repair environmental damage

1. provision can only be set up to rectify environmental damage that has already happened. No obligation to restore future environmental damage because entity could cease operations
2. Merely causing damage or intending to clean up the site doesn’t create an obligation- unless it publicizes policies that include environmental awareness Or explicitly undertakes to clean up the damage caused by its operations

Question 20

Full cost of environmental provision should be recognized when

Answer 20

Obligation arise

Should be discounted since effect of time value of money is usually material

If expenditure results in future economic benefit then an equivalent asset should be recognized

Question 21

Restructuring

Answer 21

Programme planned and controlled by management and has a material effect on

1. Scope of business entity has undertaken in terms of product or service
2. Manner in which business undertaken by the reporting entity is conducted

Question 22

Restructuring could include

Answer 22

Closure of a sale of a line of business
Closure of business locations in a country
Relocation of business activities from one country to another

Question 23

When can a provision for restructuring be recognized

Answer 23

When there is a constructive obligation

Ie

1. There is a detailed formal plan for restructuring that identifies the businesses location and employees affected as well as an estimate of the cost and timing involved
2. Employees affected have valid expectation that the restructuring will be carried out, either because the plan has been formally announced or because the plan has started to be implemented.

Obligation must exist at the reporting date

Question 24

Measurement of restructuring provision

Answer 24

Only direct costs (necessarily entailed by the restructuring and not associated with ongoing activities of the entity)

Recognize best estimate of expenditure required and it should take into account expected future events.

Question 25

Costs NOT to be included in a restructuring provision as per ias 37

Answer 25

Retaining staff
Relocating staff
Marketing products 
Expenditure on new systems 
Future operating losses
Profit on disposal of assets

Question 26

Disclosure

Answer 26

Provide description of the nature of each class of provision 
Include info about uncertainty relating to the expected timing or amount of the expenditure required