Provisions and Contingencies Flashcards
Which IAS covers provisions, contingent liabilities and assets?
IAS 37
Why was IAS 37 introduced?
There was little guidance for provisions
- companies would choose to make and then release provisions to smooth out profits
Provision definition
liability of uncertain timing or amount
What distinguishes provisions from other liabilities?
- trade payables/accruals are certain
- provision there is uncertainty about timing to amount of expenditure
Recognition criteria of a provision
- an entity has a present obligation (legal/constructive) as a result of a past event
- probable (more than 50%) that a transfer of economic benefits will be required to settle
- reliable estimate of the obligation
Legal Obligation
- arises out of a contract - sold goods with warranty
- or out of legislation - redundancy pay
Constructive Obligation
- arises through past behaviour/actions
- where entity has raised a valid expectation that it will carry out a particular action
- ‘reputation with customers’
Probable Outflow
- more likely than not to occur
- greater than 50% chance of occurring
Measurement of estimate
- amount recognised is best estimate
- of expenditure required to settle present obligation at end of reporting period
- determined by judgement of entity management and experience of similar transactions
How does provision change if relating to more than one item?
- one item, best estimate of expenditure used
- lots of items, calculated using expected value approach which is weighted (warranties generally)
- Provision = Probability x expected outcome
What is the double entry for a provision?
Dr Expense (SoP/L)
Cr Provision (SoFP) current liability if less than yr, NCL if over a yr
Double Entry to increase a provision?
Dr Expense (SoP/L)
Cr Provision (SoFP)
increase by amount of change if related to original provision
Double Entry to decrease provision?
Dr provision (SoFP)
Cr Expenses (SoP/L)
Disclosure for provisions in financial statements
- reconciliation of carrying amount at begin/end, additional provisions, amounts used
- description of nature
- expected timing of any outflows
- indication of uncertainties
- major assumptions
- any expected reimbursements (insurance?)
Contingent Liabilities
- uncertain liability that does not meet three criteria for recognising a provision
- possible obligation arising from past events and existence will only be confirmed by occurrence/non-occurence of one/more uncertain future event
- not wholly within control of entity
OR - present obligation that is not probable of an outflow of economic resource/ cannot be measured reliably
How should continent liabilities/assets be shown in financial statements?
- disclosed in notes
- not included in numbers at all
What does an obligation being remote mean?
- it is to unlikely to be disclosed in notes and so is not mentioned at all
What is the flow chart for working out if something is a provision or contingent liability?
Present obli - No - possible obli - no - do nothing
- yes
Probable outflow- No- remote (yes do nothing) (no contingent liability)
- yes
Reliable estimate - no disclose contingent liability
- yes- provide
How should a contingent liability/asset be disclosed in financial statements?
- nature of contingent liability
- estimate of financial effect
- uncertainties
- possibility of reinbursement
Contingent Asset
- possible asset
- arising from past event
- existence will be confirmed by occurrence/non-occurrence of 1/more uncertain future events
- not wholly within control of entity
When should a contingent asset be disclosed?
- if probable that economic benefit will flow to entity
- important to not recognise proper assets until virtually certain as display of prudence
