provisions

Question 1

Provision definition

Answer 1

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)

Question 2

IAS 37 initial recognition

Answer 2

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

Question 3

no provision liability if

Answer 3

• 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)

Question 4

Subsequent measurement

Answer 4

• 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)

Question 5

scenarios : onerous contract

Answer 5

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

Question 6

scenario restructuring : future redundancy costs

Answer 6

• 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

Question 7

scenario asset dismantling and restoration costs

Answer 7

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

Question 8

scenario amount reimbursed by third party

Answer 8

virtually certain-receivable on SOFP

probable = contingent asset disclosed in notes

Question 9

current tax

Answer 9

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