Lecture 5 - Provisions, Contingencies and Events After the Reporting Period Flashcards
‘big bath’ provisions?
an accounting manipulation designed to boost profits & improve trends in future reporting periods
how does a ‘big bath’ provision impact the FS?
made in the earlier period reducing net assets and profits (or increasing losses)
journal entry for creation of a provision for future expenses?
dr expense, cr provision
reversal: dr provision, cr expense
define a provision?
a liability of uncertain timing or amount
when is a provision recognised?
when the following are satisfied:
- entity has a present obligation resulting from a past event
- probable outflow of economic benefits
- reliable estimate can be made
a past event which leads to a present obligation is an…
obligating event
what makes a past event an obligating event?
the entity must have no realistic alternative but to settle the obligation
the obligation is unavoidable
what makes an obligation unavoidable?
- obligation is legally enforceable
- entity has created assurance that it will settle the obligation
constructive obligation?
when an entity gives assurance that they will settle an obligating event and gives valid expectation that this will be carried out
warranty?
a guarantee provided by a seller to a buyer
promising that a product will meet certain quality standards
if the product fails to meet the standard; refunds, replacements or repairs can be claimed
when there’s over 50% chance that a present obligation exists…
recognise a provision
when there’s under 50% chance that a present obligation exists…
disclose a contingent liability
if a reliable estimate of an obligatory amount cannot be made…
a contingent liability must be disclosed
only recognise provision if an estimate can be reliably made
what should the amount of a provision be?
the best estimate of the expenditure required to settle the obligation
onerous contract?
a contract in which the unavoidable costs of settling the obligation exceed the economic benefits expected to be received
present obligation should be recognised as a provision
are provisions for future operating losses recognised?
no
define a contingent liability?
a possible obligation that arises from past events and whose existence will be confirmed by the occurrence (or non-occurrence) of an uncertain future event
not wholly in the entity’s control
alternative definition for a contingent liability?
a present obligation that arises from past events but doesn’t meet the criteria for a provision
how are contingent liabilities treated in the FS?
they’re not recognised
they’re disclosed in the notes
unless the possibility of an outflow of economic benefits is remote
define contingent asset
a possible asset that arises from past events and whose existence will be confirmed only by the occurrence (or non-occurrence) of an uncertain future event
not wholly within the entity’s control
how are contingent assets recognised?
disclosed in the notes, not recorded as an asset until settled
shouldn’t be recognised unless future inflow of economic benefits are probable
provision characteristics
- recognised as liability
- present obligation
- probable outflow of resources
- reliable estimate of amount
contingent liabilities characteristics?
- not recognised as liability
- disclosed in notes
- possible, not probable obligations
- present obligation, but recognition criteria not met
- outflow of resources not probable, nor reliably measurable
events after the reporting period refer to…
events that occur after the reporting date, but before FS are issued
adjusting events?
further evidence of conditions that existed within the reporting period
non-adjusting event?
indicative of conditions that arose after the reporting period
how are adjusting events treated?
adjustments are made in the FS
how are non-adjusting events treated?
no adjustment made to the FS
examples of adjusting events?
- court case confirms that a present obligation exists at y/e
- information confirms an asset is impaired and requires write down
- customer bankruptcy requires T/R to written down
- sale of inventory confirms NRV is overstated
- discovery of fraud shows FS are misstated
examples of non-adjusting events?
- announcing plans to discontinue operations
- major purchase of assets
- large changes in asset prices or foreign exchange rates after y/e
dividends declared after the reporting period are…
not recognised as a liability at the y/e date
disclosure required of dividends proposed after the y/e but before FS is issued
IAS10?
IAS37?
IAS10 = events after the reporting period
IAS37 = provisions, contingent liabilities & contingent assets
