provisions Flashcards
Provision definition
A liability of uncertain timing/amount:
- a legal or constructive obligation (constructive obligation: expectation that the company will pay)
- as a result of past events
- future economic cash outflow probable (over 50%)
- can be measured reliably (best estimate of future payment)
IAS 37 initial recognition
record provision liability of SFP (Cr prov Dr P+L)
- single payment to be made - use most likely payment amount
- multiple payments to be made - use expected value (weighted average)
- Payment to be made later than 12 m discounted to PV using discount factor/EIR
- provision subsequently measured using amortised cost
-EIR will increase the initial liability to the actual amount of cash paid
no provision liability if
- does not meet definition of provision
- Future losses are not a result of a past event (unless onerous contract)
- Outflow not probable (contingent liability disclosed in notes and not recorded on SFP if outflow or obligation is only possible rather than probable)
Subsequent measurement
- Provision measured at each year end with movement recorded in PL (Dr/cr provision, cr/dr pl)
- Difference between amount of provision and cash actually paid to settle liability is recorded in P&L
cr cash, dr provisions, cr/dr PL (difference)
scenarios : onerous contract
future costs exceed future revenue:
- legal obligation if there is a contract
- A result of past events because a contract has been signed
- provision lower of: PV future costs/contract penalty
scenario restructuring : future redundancy costs
- constructive obligation if redundancies announced
- A result of past events because restructuring announced
- provision is PV of costs directly attributable to restructuring and not ongoing costs
scenario asset dismantling and restoration costs
legal obligation if contract/ constructive obligation if expected behaviour to restore
a result of past events once asset constructed
provision is PV of future costs
Provision expense directly attributable to bringing asset into use so is capitalised :
- cr provision, dr PPE
- subsequent depr will be higher
scenario amount reimbursed by third party
virtually certain-receivable on SOFP
probable = contingent asset disclosed in notes
current tax
provision for tax payable on current year profits
the FS are prepared before the tax return ism submitted so an estimate is used
-Dr Tax Expense (P&L), CR Tax payable
Difference between amount of provision and cash actually paid to settle liability is recorded in P+L
-cr cash, dr tax payable cr/dr difference to PL