Provisions and Contingencies Flashcards
Provisions recognition
Always a liability, Must be a legal or constructive obligation
Must be a present obligation from past event
Must be intention to make payment
Reliable estimate can be made
Probable estimate outflow of economic resources
Contingent Liabilities/Assets
Possible not probable obligation from past events. Control of whether it happens may not be in hands of the entity
Possible NOT probable that outflow of economic resources
Amount cannot be sufficiently measured
Summary
Probable Outflow: Provision
Possible Outflow: Contingent Liability
Probable Inflow: Contingent Asset
Possible inflow: Ignore
Other Provisions
Warranties: set up at the time of sale, reviewed at the end of each accounting period
Guarantees: made if probable that payment will be made
Future operating losses/repairs: NO
Environmental: if legal or constructive obligation. Discounted to PV
Accounting for contingent assets and liabilities
Not recognised in the SoFP, simply disclosed ion a note
Events after the reporting period
Occur between reporting date and date which FS’ are approved for issue by the board
Adjusting
Adjusting: events after the reporting date that provide evidence of existence at the reporting date
Examples: Irrecoverable debts after reporting date to help quantify allowance for receivables
Sale of inventory below cost
Fraud or errors
Insurance claims that were in motion at reporting date
Non-adjusting events
Non-adjusting events: are events that arose after the reporting date
E.g. Major business combination, destruction of a major production by fire, abnormally large change in asset prices or FX rates after reporting date
Accounting for adjusting events
Adjusting: recognise in FS’
Non-adjusting, disclose a note in the financial statements
Included in provisions
Any costs up until the event e.g. Redundancy, lease termination.
Exclude: on going costs e.g. relocation, retraining
