Module 10 Accounting for Provisions and Contingencies

Question 1

Short Answer

What is the applicable standard for accounting for provisions and contingencies?

Answer 1

IAS 37 Provisions, Contingent Liabilities, Contingent Assets

Question 2

Definition

It is is a liability of uncertain timing or amount (sometimes referred to as an estimated
liability).

Answer 2

Provisions

Question 3

Fill in the Blanks

Provisions are very common and may be reported as either current or non-current dependingon the ________________________.

Answer 3

date of expected payment

Question 4

Enumeration

Enumerate the common types of Provisions

Answer 4

litigation, warrantees or product guarantees, business restructurings, and environmental damage.

Question 5

Identification

There is some question over either how much will be paid or when this will be paid

Answer 5

Provision

Question 6

Identification

The process of going to court to settle a dispute (or “alitan”).

Answer 6

Litigation

Question 7

Fill in the Blanks

The primary difference between warranty and guarantee is that a warranty is a ________________ , whereas a guarantee can be __________________________.

Answer 7

written promise; written or oral

Question 8

Definition

It is a process that a company goes through to make significant changes to its organizational structure, operations, or finances.

Answer 8

Business restructuring

Question 9

Definition

Itis a programme that is planned and controlled by
management, and materially changes either:

(a) the scope of a business undertaken by an entity; or
(b) the manner in which that business is conducted.

Answer 9

restructuring

Question 10

Explanation

The difference between a provision and other liabilities (such as accounts or notes payable, salaries payable, and dividends payable) is that ?

Answer 10

a provision has greater uncertainty about the timing or amount of the future expenditure required to settle the obligation.

Question 11

Definition

It refers to the recognition of revenue or expenses in the financial statements before the cash is received or paid.

Answer 11

“Accrue”

Question 12

Definition

It is often used to describe revenues or expenses that have been
recorded but have not yet been settled in cash.

Answer 12

“accrued”

Question 13

Enumeration

Companies accrue an expense and related liability for a provision only if the following three conditions are met.

Answer 13

1. A company has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.

Question 14

In applying the first condition, the past event (often referred to as the ____________________ ) must have occurred. In applying the second condition, the term ________________ is defined as “more likely than not to occur.” This phrase is interpreted to mean the probability of occurrence is greater than 50 percent. If the probability is 50 percent or less, the provision is not recognized

Answer 14

past obligatory event; probable