IAS 37 - Provisions, Contingent Liabilities and Contingent Assets

Question 1

provision

Answer 1

-A liability of uncertain amount and/or timing of any payment

Question 2

obligating event

Answer 2

an event that creates a legal or constructive obligation resulting in an entity having no realistic alternative to settling the obligation

Question 3

legal obligation

Answer 3

an obligation deriving from a contract, legislation, or other operation of law

Question 4

constructive obligation

Answer 4

-An obligation deriving from an entity’s actions such as as an established pattern of past practice, or where the entity has created a valid expectation

Additional notes
(remember both examples: “to refund”)

• Example of “pattern of past practice”
• to refund the difference if another local shop is currently selling the same goods at a lower price
• Example of “valid expectation”
• to refund cash against returned goods without insisting on seeing the receipt

Question 5

accounting for provisions

Answer 5

remember 2 “recognised”, 2 “amount”; 6 points

• A provision is to be recognised as a liability in the financial statements when:
• an entity has a present obligation as a result of a past event
• it is probable (more than 50% likelihood of occurrence) that an outflow of economic benefits will be required to settle the obligation
• a reliable estimate can be made of the amount of the obligation
• A provision cannot be recognised for future operating losses
• The amount of the change in the provision is recognised as an expense in the SOPL and other comprehensive income
• The total amount of the provisions is shown as a liability on the SOFP (under “long-term provisions”)
• If a provision is no longer required, it is to be reversed and shown as income in the SOPL and other comprehensive income
• A provision should also be disclosed as a note to the financial statements, giving:
• details of changes in the amount of provisions between the beginning and end of the year
• a description of the provision(s) and expected timings of any resulting transfers
• an indication of the uncertainties regarding the amount or timing of any resulting transfers

Question 6

contingent liability

Answer 6

• A contingent liability is
• either a possible obligation (< 50% likelihood of occurrence) arising from past events, the outcome of which will only be determined by one or more future events outside of the entity’s control
• or a present obligation, arising from past events, which cannot be measured reliably

-If it’s remote, then no disclosure is required in the notes to the statements

Question 7

accounting for contingent liabilities

Answer 7

-Not recognised in the financial statements

• Disclosed as a note to the financial statements which includes:
• a brief description of the nature of the contingent liability
• an indication of the uncertainties relating to the amount or timing of any outflow
• the possibility of any reimbursement

Question 8

contingent asset

Answer 8

A possible asset arising from past events, the outcome of which will only be determined by one or more future events outside of the entity’s control

Question 9

accounting for contingent assets

Answer 9

-Not recognised in the financial statements

• Disclosed as a note to the financial statements only where an inflow of economic benefits is probable, including:
• a brief description of the nature of the contingent asset
• an estimate of its financial effect