Provisions And Contingencies (10) Flashcards
What is a provision?
IAS 37 provisions, contingent liabilities and contingent assets says ‘a provision is a liability of uncertain timing or amount’
What is a liability?
A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The obligation is a duty/responsibility that the entity has no practical ability to avoid.
When should a provision be recognised?
IAS 37 says ‘a provision should be recognised when:
- an entity has a present obligation as a result of a past event
- it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
- a reliable estimate can be made of the amount of the obligation
What’s the accounting treatment for a provision?
Dr Expense (SPL)
CR provision (SFP)
What is an onerous contract according to IAS 37?
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
Unavoidable costs are the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it.
A provision for the cost should be recognised as an expense in the SPL in the period when the contract becomes onerous.
What is a provision for restructuring according to IAS37?
IAS 37 defines a restructuring as ‘a programme that is planned and controlled by management, and materially changes either:
- the scope of a business undertaken by an entity; or
- the manner in which that business is conducted’
A provision may only be made if:
- a detailed, formal and approved plan exists
- the plan has been announced to those affected
The provision should:
- include direct expenditure arising from restructuring
- exclude costs associated with ongoing activities
Each class of provision requires a narrative disclosing what?
An entity should provide narrative disclosures including:
- a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefit
- an indication of the uncertainties about the amount and timing of outflows; and
- the amount of any expected reimbursement, stating that the amount of any asset that has been recognised for that expected reimbursement
What are the three types of uncertain liability?
- remote (ignore, nothing is recorded)
- possible (disclose as a contingent liability)
- probable (>50% chance provide, assuming all of the recognition criteria have been met)
When a contingent liability is possible, IAS 37 requires that what should be disclosed?
A brief description of the nature of the contingency and, where practicable:
- an estimate of the financial effect
- an indication of uncertainties relating to the amount or timing of any outflow
- the possibility of any reimbursement
What are the 4 types of uncertain asset?
Uncertain assets are split into 4 groups:
- remote (ignore, nothing is recorded)
- possible (ignore, nothing is recorded)
- probable (disclose as a contingent asset)
- virtually certain (recognise the asset)
How do you disclose a contingent asset?
IAS37 requires that the following should be disclosed:
- a description of the nature of the contingent asset
- where practicable an estimate of the financial effect
How do we recognise a ‘virtually certain’ asset?
Dr receivable
Cr SPL (other income)
What’s the accounting treatment for a reimbursement?
If:
- the reimbursement is virtually certain AND
- the settlement of the claim on which the reimbursement depends is probable
Then the company should record both a provision and associated asset.
- the asset and liability must be disclosed separately on the SFP
- SPL amounts may be netted off
- the amount of the asset may not exceed the amount of the provision
