Provisions And Contingencies Flashcards
What is a provision
A liability of uncertain timing or amount
When should a provision be recognised
The entity has a present obligation as a result of a past event (obligation)
It is probable that an outflow of resources will be required to settle the obligation
A reliable estimate can be made as to the amount of the obligation (best estimate)
Must be an obliging event - company must have no realistic alternative but to settle
What are the grey areas
Lawsuit- may be dispute if their is an obliging event or not so if it is more likely than not that a present obligation exists a provision should be recognised
If it is more likely than not there is no present obligation a contingent liability should be disclosed
Measurement of a provision
Should reflect a reliable estimate of the amount of obligation
If a reliable estimate cannot be made then a contingent liability should be disclosed
Should be best estimate
Consider time value of money
Future events should be considered
What happens if there are several outcomes?
If single obligation Usually the cost of the most likely outcome
With large population items the amount should calculate the expected value ( weight all outcomes by their associated probabilities)
Provisions should be reviewed at the end of each reporting period
Tell me about future operating losses
Are not present obligations and so do not satisfy the recognition criteria
Tell me about restructuring costs
A constructive obligation only arises when the entity has a detailed formal plan - if sale of operation is involved, no obligation arises until there is a binding agreement
What costs must be excluded from restructuring costs
Staff retraining and reallocation
Marketing costs
Cost of investment in new systems
What is a contingent liability
A possible obligation depending on whether some uncertain future event occurs
A present obligation but payment is not probable or the amount cannot be measured reliably
What is a contingent asset?
A possible asset that arises from past events whose existence will only be confirmed by the occurrence of a future event
Recognition only allowed if asset is virtually certain, has to be greater than 50 probability to be disclosed
What are the disclosure requirements
The CA at the beginning and end of the reporting date
Additional provisions made
Amounts used and reversed in the period
Brief description of the nature of the obligation
What are the disclosure requirements for a contingent liability?
A brief description I the nature of the liability
Indication of the uncertainty involved
Estimate of the financial effect
What is an obliging event?
A past event
Company must have no realistic alternative but to settle that debt
