Provisions and Contingencies

Question 1

What is the recognition criteria for provisions? (3)

Answer 1

Entity has present obligation because of past event
Probable that outflow of resource required to settle
Reliable estimate can be made

Question 2

Give double entry for provision and for use of provision

Answer 2

Dr Expense
Cr Provision (SFP)

Warranty might be charged to COS

Dr Provision
Cr Cash

Question 3

Define onerous contracts and unavoidable costs

Answer 3

Onerous- contract where unavoidable cost of meeting obligation exceeds benefits received

Unavoidable- lower of cost of fulling contract and any penalties of not fulfilling contract

Question 4

What is a provision for restructuring and when is it recognised? What would it include (2)?

Answer 4

Program planned and controlled by management materially changing scope of business or manner which its conducted

Provision exists if detailed plan exists and has been announced to affected parties

Provision includes direct expenditure but not costs associated with ongoing activity

Question 5

How do you treat dismantling and restoration costs?

Answer 5

If obligation exists at acquisition to dismantle at end of useful life, cost of frustration is directly attributable

Question 6

List 3 disclosures for provisions

Answer 6

Description of obligation and expected timing of outflow
Indication of uncertainties about timing/amount
Amount and any similar instances
(description, uncertainty, amount)

Question 7

What 3 things uncertain liabilities broken into and how do you treat

Answer 7

Remote- Ignore
Possible- under 50% and disclose as contingent liability
Probably- more than 50% and provide if recognition criteria met

Question 8

How do you treat uncertain assets (3)

Answer 8

o Remote and possible- ignore
o Probable- disclose as contingent asset
o Virtually certain- recognise the asset
(Dr receivable Cr SPL other income)