Lecture 5 - Provisions and Cash Flows Flashcards
Provisions
Definitions
A provision is a liability of an uncertain timing or amount
Liability = Present obligation of the entity arising from past events, the settlement of which is expected to restul in an outlow of economic resources embodying economic benefits
Sources:
Provisions
Constructive Source (3 sources, 2 effects)
Derives from the entity’s action where by an established pattern of:
- Past practices
- Published policies
- Specific current statement
–> Indication of acceptane of reponsability
–> Create a valid expection of others from the entity
Provisions
Measurement
Take into account:
- The risks and uncertainties
- Discount of the provision when time value of money is material
- Future event, when sufficient objective evidence they will occur
- No gains from expected disposal of assets
Best Estimate
= the amount an entity would rationally pay to settle the obligation or to transfer it to a third party
- Amounts are undermined by judgement of management supplemented by experience and in some cases expert reports
- Uncertainties shall be measured by the weighting of all possible outcomes (“expected value”)
Present Value of Future Expenditures
- Used if the time value of money is considerable
- Discount rate = pre-tax rate that reflects current market assessments of the time value of money and the specific risks
- Discount rate shall not relfect risks for which future cash flows have been adjusted
Provisions
Best Estimate Concept - 2 approaches
weighted average vs. most likely option
Restructuring - when does a constructive obligation arise?
Provisions
IAS 37 effectively bans…
- big bath accounting = provisiosn is recorded in a year with high profits to inflate future profits
- Creation of provisions where no obligation to a liability exists
- The use of provisions to smooth profits
Provisions
Onerous Contracts
Under IAs 37, onerous contracts are classified as provisions and are measured using the best estimate of expenses required to satisfy the current obligation.
Contingent Liabilities
Definitions
A contingency is an unforeseen event that may or may not happen
A contingent liability
= a possible obligation that arises from past events and whose existence will only be confirmed only be the occurence or non-occurence of one or more uncertain future events not wholly within the control of the entity
or
= a present obligations that arises from past events but is not recognized because
- outflow of economic benefits not probable
- Amount cannot be measured reliably
Contingent Liability
Recognition
Contingent Assets
Definition
= a possible asset that arises from pas events and whose existence will be confirmed only by the occurence or non-occurence of one or more unertain events not wholly within the control of the entity
Statement of Cash Flows
Overview
Statement of Cash Flows
Important Aspects
- Determination of profit is complex and potentially misleading
- Complete and incomplete transactions
- Complete: Final cash settlement, no problem in profit determination
- Incomplete: no final settlement, estimations according to accrualy concept (maching), assumptions about the future are necessary.
Statement of Cash Flows
Operating Activities
= the principle revenue producing activities. All activities that do not classify as investing or financing activities, are operating.
Statement of Cash Flows
Investing Activities
= include the acquisiiton and disposal of long-term assets and investments not included in cash equivalents
Statement of Cash Flows
Financing Activities
= Activities that result in changes in the size and composition of the equity capital and borrowing of the enterprise
Statement of Cash Flows
Format
Statement of Cash Flows
Format - Direct vs. Indirect Method
Statement of Cash Flows
Example Direct Method
Statement of Cash Flows
Example Direct Method
