l2.1 : provisions, contingencies & events after reporting period Flashcards
state and explain the three requirements that define a liability.
- present obligation (duty to act or perform a certain way)
- past event (future commitments not relevant)
- outflow of economic benefits (cash reduction, transfer of another asset, barter exchange)
definition intentionally broad to ensure no liabilities omitted or hidden
state and explain the two requirements for a liability to be recognised.
- probable outflow (certainty that obligation will result in economic benefit outflow)
- measured reliably (documented evidence to support amount recorded in FS)
define provision according to ias37.
liability of uncertain timing or amount
state three examples of provisions according to ias37.
- warranty claims
- refunds for returns
- restructuring costs
when can provisions be used?
can be used for profit smoothing. if profits are going to be anamoly high one year, then provision can reduce profit. prevents investors from expecting high profits in following years.
state and explain the three criteria for the recognition of provisions according to ias37.
- present obligation from past event
- probable outflow of economic benefits
- measure reliably
how is “obligation” defined in ias37?
- legal (contract, legislation)
- constructive (past behaviour / statements that create valid expectation that company will act in certain way)
how is “probable” defined in ias37?
more likely to occur than not (>50% chance that entity will transfer resources to another party)
how is “reliable measure” defined in ias37?
mgt judgement of similar transactions. must be aware that risk & uncertainty involved.
what is a contingent liability?
- not recognised in FS
- may require disclosure (unless remote - extremely unlikely). should include description, estimated financial effect, indiciation of uncertainties, possibility of reimbursement
