Liabilities Flashcards
What are liabilities?
A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in the outflow from the enterprise of resources embodying economic benefit
What are types of liabilities?
Specific amounts of liabilities owed by an entity to specific creditors, obligation known to exist but amount has yet to be determined, and obligation might exist if some future event happens
What are the types of obligation?
Legal obligation and constructive obligation
What does legal obligation mean?
Another person/entity has a legal claim on payment
What does constructive obligation mean?
In this situation an entity has by its actions created a valid expectation on the part of other parties that it will discharge certain responsibilities
What is a provision?
A provision is any amount retained as reasonably necessary for the purpose of providing for any liability or loss which is either likely to be incurred, or certain to be incurred but uncertain as to amount or as to date on which it will arise
What did the provision definition introduce?
It introduced flexibility in relation to making provisions - companies created ‘big baths’ provisions to smooth profits, practice which ASB wanted to stop
What are some items recognised as suitable subject matter for provisions?
Product warranties, environmental liabilities, and reorganisation costs
What are the principles of provision under FRS 102/IAS 37?
Provisions should be recognised when and entity has a present obligation as a result of a past event, it is probably that a transfer of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation
What should provisions for restructuring include?
Only those direct expenditures that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity
What costs does restructuring provisions not include?
Retraining/relocating of continuing staff, marketing or investment in new systems and distribution networks
What can be included in provision for reorganisation?
Redundancies, costs of terminating leases/other contracts, and expenditure made in the course of reorganisation (e.g. employees remuneration whilst dismantling plant)
What should you ask yourself in order to decide whether a provision should be recognised?
Is there an obligation as a result of a past transaction or event? Is a transfer or economic benefit probably? Can a reliable estimate be made?
What are contingent liabilities?
Contingent liabilities is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity’s control
Are contingent liabilities recognised on the balance sheet?
Contingent liabilities are not recognised on balance sheet - certain disclosure requirements
