IAS 37 Provisons, Contingent Assets And Contingent Liabilities

Question 1

Define the term provision

Answer 1

“A liability of uncertain timing or amount”

Question 2

Contingent liability

Answer 2

a possible obligation that arises from past events whose outcome is based on uncertain future events or, an obligation that is not recognised because it is nor probable, or cannot be measured reliably e.g. a legal case that is lost by an entity and they will be required to pay damages

Question 3

Contingent Asset

Answer 3

A possible event that arises from past events and whose existence will only be confirmed by uncertain future events not wholly within the control of the enterprise e.g. a legal case that will result in damages if the case is won

Question 4

Explain the requirements to recognise provision/ CA/CL

Answer 4

Has a present obligation (either legal or constructive) arising as a result of past events
It is probable that a transfer of economic benefits will be required to settle the obligation
The obligation can be measured reliably

Question 5

Measure a provision and understand the disclosure of provisions, contingent assets and contingent liabilities

Answer 5

A best estimate of the expenditure an entity would rationally pay to settle the present obligation at the end of the reporting period
Time value of money should be taken into account with provisions.

Question 6

Accounting for contingent assets

Answer 6

should not be generally recognised, but if the probability of possible inflows is probable they should be disclosed, if the outcome is virtually certain then they should be recognised as an asset

Question 7

Accounting for Contingent Liabilities

Answer 7

should not be recognised in the SOFP, should be disclosed in a note unless the possibility of a transfer of economic benefit is remote