IAS 37 and IAS 10

Question 1

What do IAS 37 and IAS 10 relate to?

Answer 1

IAS 37 - Provisions and Contingencies, which includes contingent liabilities and assets.

IAS 10 - Events after the reporting period which may be adjusting or non adjusting.

Question 2

What is a provision?

Answer 2

A provision is a liability of uncertain timing or amount. With the liability being a present obligation arising from a past event which is expected to result in an outflow of economic benefit.

Examples of liabilities which may require a provision are:

• Tax
• Warranties
• Refunds
• Court cases/disputes.

Question 3

When should a provision be recognised?

Answer 3

A provision should be recognised when:

• There is a present obligation from past events.
• There is a probable outflow of economic benefits
• The probable outflow can be measured reliably.

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

NOTE if the effect of the time value of money is material the provision should be at the net present value.

Provisions cannot be made for future operating losses.

Question 4

What about Onerous contracts?

Answer 4

An onerous contract = where unavoidable contract costs will exceed benefits obtained.

A provision for this is recorded at the lower of:

• Cost of fulfilling the contract
• Cost of terminating the contract.

Question 5

What are the accounting entries for provisions?

Answer 5

Initial recognition - Dr Expense SPL/Cr Provision SFP

Fully or partly settled - Dr Provision SFP/Cr Bank

y/e adjustment/increase - Dr Expense/Cr Provision

Question 6

Can restructuring give rise to a provision?

Answer 6

Restructuring may give rise to a provision if:

• A detailed, formal, approved plan exists
• The plan has been announced to those effected.

Expenditure which may be included - Redundancy costs

Expenditure which may not be included - Costs associated with ongoing activities, retraining or relocating staff.

Question 7

What about environmental provisions?

Answer 7

An environmental provision may arise where there is a future legal or constructive obligation to carry out the work.

Question 8

What is a contingent Liability?

Answer 8

Contingent liability -

• Possible obligation that will be confirmed by future events not controlled by the entity. or
• Present obligation where economic outflow is not probable. or
• Present obligation where outflow of economic benefit cannot be measured.

Provisions are not made for contingent liabilities , they are disclosed in the notes to financial statements.

If the probability of the liability is remote it is ignored.

Question 9

What is a contingent asset?

Answer 9

A contingent asset - Where existence of the asset will only be confirmed by future events not controlled by the company.

These are disclosed in the financial statements if economic inflow is probable.

Question 10

When should a liability or asset be provided for?

Answer 10

Liabilities -

• Virtually certain - provide
• Probable (>50%) - Provide
• Possible - Disclose
• Unlikely - ignore

Assets

• Vitually certain - recognise.
• Probable - Disclose
• Possible/unlikely - ignore.

Question 11

What about events after the reporting period?

Answer 11

An event after the reporting period occurs after the end of the period but before the financial statements are approved for issue.

• Event provides evidence about conditions at the reporting date - Adjsut the financial statements
• Does not provide evidence about conditions at the reporting date - Do not adjust, but if material disclose.
• Does not provide evidence but affects the going concern assumption - Adjust financial statements.