IAS 37 and IAS 10

Question 1

What are the objective of IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

Answer 1

• appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets
• sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount

Question 2

What is a provision?

Answer 2

• is a liability of uncertain timing or amount
• is a liability 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

Question 3

When a provisions shall be recognised?

Answer 3

• an entity has a present obligation (legal or constructive) as a result of a past event
• a reliable that an outflow of resources embodying economic benefits will be required to settle the obligation

Question 4

What obligation can be:

Answer 4

• legal/contractual
• constructive - where the company establish a valid expectation through a course of past practice

Question 5

What is a contingent liability?

Answer 5

• 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
  -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
• is disclosed as a note to the accounts only, no entries

Question 6

What is a contingent asset?

Answer 6

• is a 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

Question 7

Double entry for a provision

Answer 7

Dr Expense
Cr Provision
- is created by charging an expense and recognising a liability

Question 8

When is a warranty provision required?

Answer 8

• is required at the time of the sale rather than the time of the repair/replacement as the making of the sale is the past event which gives rise to an obligation.

Question 9

Estimates on warranty provision

Answer 9

• how many claims will be made - if manufacturing techniques improve, there may bee fewer claims in the future than there have been in the past
• how much each repair will cost - as technology becomes more complex, each repair may cost more

Question 10

The provision set up at the time of sale

Answer 10

• is the number of repairs expected in the future multiplied by the expected cost of each repair
• should be reviewed at the end of each accounting period in the light of further experience

Question 11

Guarantees provision

Answer 11

• should be made for this guarantee if it is probable that the payment will have to be made

Question 12

What is an onerous contract?

Answer 12

• is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it

Question 13

When it will be future environmental provision?

Answer 13

• made for future environmental costs if there is either a legal or constructive obligation to carry out the work
• this will be discounted to present value at a pre-tax market rate

Question 14

What is a restructuring?

Answer 14

• is a programme that is planned an controlled by management, an materially changes either:
• the scope of a business undertaken by an entity or
• the manner in which that business is conducted

Question 15

When a provision may be made?

Answer 15

• a detailed, formal and approved plan exists
• the plan has been announced to those affected

Question 16

What provision of restructuring should:

Answer 16

• include direct expenditure arising from restructuring
• exclude costs associated with ongoing activities

Question 17

What is the accounting for contingent liabilities?

Answer 17

• should not be recognised in the statement of financial position
• should be disclosed in a note unless the possibility of a transfer of economic benefits is remote

Question 18

What is the accounting for contingent assets?

Answer 18

• should not generally be recognised, but if the possibility of inflows of economic benefits is probable, they should be disclosed

Question 19

What are the events after the reporting period?

Answer 19

• are those events, both favourable and unfavourable, which occur between the reporting date and the date on which the financial statements are approved for issue by the board of directors

Question 20

What are the adjusting events?

Answer 20

• are events after the reporting date that provide additional evidence of conditions existing at the reporting date

Question 21

What are the non-adjusting events?

Answer 21

• are the events after the reporting date that concern conditions that arose after the reporting date

Question 22

Examples of adjusting events

Answer 22

• irrecoverable debts arising after the reporting date, which may help to quantify the allowance for receivables as at the reporting date
• sale of inventory below cost, providing evidence of net realisable value
• amounts received or receivable in respect of insurance claims which were being negotiated at the reporting date
• the discovery of fraud or errors

Question 23

Examples of non-adjusting events

Answer 23

• a major business combination after the reporting date
• the destruction of a major production plant by a fire after the reporting date
• abnormally large changes in asst prices or foreign exchange rates after the reporting date

Question 24

How do we account for proposed dividends ?

Answer 24

• we account on cash basis so they are non-adjusting events after the reporting date and must be disclosed by note as required by IAS 1