Provisions and Accruals Flashcards
What are provisions and accruals?
Non Financial liabilities for which the payment obligation, timing or amount is uncertain. The degree of uncertainty is higher with provisions than accruals
If the liability can not qualify as an accrual or provision because the uncertainty is very high, then?
It can quality as contingent liability
What are the aims of provisions and accruals?
Show true and fair view of financial statement.
Where are accruals/provisions and contingent liabilities included in the Financial statements?
Accruals/Provisions: Part of Liabilities (must be split short & longterm),
Contingent liabilities: In the notes
When do provisions and accruals have to be recognized?
When all 3 criteria are met: 1) Existence of a present obligation as a result of a past event 2) It is probable that the obligation will lead to an outflow of resources in the future 3) The outflow can be estimated reliably
Example accrual
Invoice not yet received, accruals for commissions. Existence and amount can be determined with high probability
Examples provisions
Warranty, Loss on onerous contract, Lawsuit (litigation), infringement of IP, costs of environmental restauration - future costs involve a high degree of uncertainty
Measurement accrual provision - Step 1 Best estimate gross, two options
A) Value = Most likely outcome, take single obligation which is most likely
B) Best estimate - expected value for the whole group %
Measurement accrual provision - Step 2 best estimate Net (consider time of money)
a) Short term provisions & accruals with less than 1 year are not discounted
b) Longer duration >12 months has to be discounted
How is the increase in provision/accrual due to time passage recognized?
Interest expense
Discounted period
Financial period vs expected settlement date minus 12 months
