Lecture 5 - Provisions, Contingencies and Events After the Reporting Period

Question 1

‘big bath’ provisions?

Answer 1

an accounting manipulation designed to boost profits & improve trends in future reporting periods

Question 2

how does a ‘big bath’ provision impact the FS?

Answer 2

made in the earlier period reducing net assets and profits (or increasing losses)

Question 3

journal entry for creation of a provision for future expenses?

Answer 3

dr expense, cr provision

reversal: dr provision, cr expense

Question 4

define a provision?

Answer 4

a liability of uncertain timing or amount

Question 5

when is a provision recognised?

Answer 5

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

Question 6

a past event which leads to a present obligation is an…

Answer 6

obligating event

Question 7

what makes a past event an obligating event?

Answer 7

the entity must have no realistic alternative but to settle the obligation

the obligation is unavoidable

Question 8

what makes an obligation unavoidable?

Answer 8

• obligation is legally enforceable
• entity has created assurance that it will settle the obligation

Question 9

constructive obligation?

Answer 9

when an entity gives assurance that they will settle an obligating event and gives valid expectation that this will be carried out

Question 10

warranty?

Answer 10

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

Question 11

when there’s over 50% chance that a present obligation exists…

Answer 11

recognise a provision

Question 12

when there’s under 50% chance that a present obligation exists…

Answer 12

disclose a contingent liability

Question 13

if a reliable estimate of an obligatory amount cannot be made…

Answer 13

a contingent liability must be disclosed

only recognise provision if an estimate can be reliably made

Question 14

what should the amount of a provision be?

Answer 14

the best estimate of the expenditure required to settle the obligation

Question 15

onerous contract?

Answer 15

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

Question 16

are provisions for future operating losses recognised?

Answer 16

no

Question 17

define a contingent liability?

Answer 17

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

Question 18

alternative definition for a contingent liability?

Answer 18

a present obligation that arises from past events but doesn’t meet the criteria for a provision

Question 19

how are contingent liabilities treated in the FS?

Answer 19

they’re not recognised

they’re disclosed in the notes

unless the possibility of an outflow of economic benefits is remote

Question 20

define contingent asset

Answer 20

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

Question 21

how are contingent assets recognised?

Answer 21

disclosed in the notes, not recorded as an asset until settled

shouldn’t be recognised unless future inflow of economic benefits are probable

Question 22

provision characteristics

Answer 22

• recognised as liability
• present obligation
• probable outflow of resources
• reliable estimate of amount

Question 23

contingent liabilities characteristics?

Answer 23

• 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

Question 24

events after the reporting period refer to…

Answer 24

events that occur after the reporting date, but before FS are issued

Question 25

adjusting events?

Answer 25

further evidence of conditions that existed within the reporting period

Question 26

non-adjusting event?

Answer 26

indicative of conditions that arose after the reporting period

Question 27

how are adjusting events treated?

Answer 27

adjustments are made in the FS

Question 28

how are non-adjusting events treated?

Answer 28

no adjustment made to the FS

Question 29

examples of adjusting events?

Answer 29

• 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

Question 30

examples of non-adjusting events?

Answer 30

• announcing plans to discontinue operations
• major purchase of assets
• large changes in asset prices or foreign exchange rates after y/e

Question 31

dividends declared after the reporting period are…

Answer 31

not recognised as a liability at the y/e date

disclosure required of dividends proposed after the y/e but before FS is issued

Question 32

IAS10?
IAS37?

Answer 32

IAS10 = events after the reporting period

IAS37 = provisions, contingent liabilities & contingent assets