Lecture 12 - Provisions Flashcards
What is the definition of a provision?
Provisions are a subset of liabilities, they are liabilities of uncertain timing or amount.
Provisions are not the same as allowances (doubtful debt, depreciation) which are reductions in the carrying amount of assets.
IAS 37 requires the recognition of a provision if three criteria are met, what are they?
- The entity has a present obligation as a result of a past event.
- It is probable that an outflow of resource (monetary) will be required to settle the obligation.
- A reliable estimate can be made of the amount of the obligation.
Obligating events can come in two forms, what are they?
- Legally enforceable obligations
2. Constructive obligations
What is meant by the term ‘constructive obligation’?
An obligation that is implied by a set of circumstances in a particular situation.
Whether an ‘obligating event’ will occur is not always clear cut, the entity must determine whether…
It is ‘more likely than not’ that a present obligation exists as a result of past events.
An obligating event can only be recognized if it is…
Independent of the entities future actions. If the obligation could be avoided, a provision cannot be made.
If a reliable estimate cannot be placed on an obligation, the entity must…
Disclose a ‘contingent liability’ in the notes of the financial statement.
The best estimate for an obligation provision is the amount the entity would…
Rationally pay to settle the obligation or to transfer it to a third party.
When considering the measurement of provisions over time, what must be considered?
The time value of money.
The amount of the provision is to be calculated at net present value.
What is meant by the term ‘onerous contract’?
An onerous contract is a contract in Wichita the unavoidable costs of meeting the obligation under the contract exceed the economic benefit expected to be received under it.
Under an onerous contract, the provision is the lower of…
The net cost of fulfilling the contract and any penalties payable as a result of failing to fulfill it.
IAS 37 defines a contingent liability as…
A possible obligation that rises from past events and whose existence will be confirmed only the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
A contingent asset 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 future events not wholly within the control of the entity.
What section of the financial statements are contingent assets and liabilities to be disclosed?
The notes to the finial statements.
