Lecture 3 - provisions Flashcards
Definition of a liability?
present obligation, past event, outflow of economic benefits
When do we recognise a liability?
When there is probable outflow and the amount can be measured reliably
What is a provision?
A liability of uncertain timing or amount
What is needed to recognise a provision?
- present obligation of past event
- Probable outflow of economic benefits
- a method to evaluate timing and amount
What are the 2 types of obligation?
Legal and contructive
What is a legal obligation?
Contract, legislation or operation of law
What is a constructive obligation?
Valid expectation that the company will act in a certain way - damages reputation if not acted on
What needs to be considered in a reliable estimate?
- mangers judgement
- information provided by events after reporting period
- Risks and uncertainty surrounding the situation
What is discounting a provision?
Where the amount of the provision should be be discounted and recorded at the PV of the expenditure required to settle the obligation
When is discounting a provision likely to be an issue?
When there is a significant amount of time before the obligation is settled
What are onerous contracts?
A contract in which the unavoidable costs of meeting the obligation exceed economic benefit expected to be received
What is the unavoidable cost the lower of in onerous contracts?
Cost of fulfilling the contract and any compensation or penalties from failure to fulfil it.
What is restructuring?
A programme planned and controlled by management that changes either:
- Scope of business undertaken by an entity
- The manner in which the business is conducted
What should restructuring provisions include?
Only direct expenditures arising from restructuring which are both:
- Necessarily entailed by restructuring
- not associated with ongoing activity
Where are expected disposals of assets accounted for?
Not in provision. Under relevant IFRS eg plant, property and equiptment
