Provisions and contingent liabilities

Question 1

A liability is…

Answer 1

a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Question 2

An obligating event =

Answer 2

an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

Question 3

A provision shall be recognized when:

Answer 3

a) an entity has a present obligation (legal or constructive) as a result of a past event (p>50%)
b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
c) a reliable estimate can be made of the amount of the obligation

Question 4

a contingent liability is

Answer 4

a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
b) a present obligation that arises from past events but is not recognized becuase:
i. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation
ii. the amount of the obligation cannot be measured with sufficient reliability

Question 5

Future events

Answer 5

• Shall be reflected where there is sufficient objective evidence
• Future changes in technology not to be considered if only believed by entity

Question 6

Reimbursements

Answer 6

• Shall be treated as a separate asset
• Only recognized if “virtually certain”
• Amount recognized for reimbursement cannot exceed the amount of the provision
  => may be netted in the statement of comprehensive income

Question 8

Changes in provisions

Answer 8

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate

Question 9

Onerous contract

Answer 9

May emerge if unavoidable costs of meeting the obligations under the contract are larger than the economic benefits expected to be received under it

Unavoidable costs = lower of net costs of contract fulfilment and penalties arising from failure to fulfil contract

=> present obligation under an onerous contract must be recognised as a provision

Question 10

Restructuring provisions

Answer 10

criteria 1: A present obligation must exist.
Criteria 2: costs must be directly and necessarily caused by the restructuring and not associated with the ongoing activities of the entity
Criteria 3: if restructuring involves the sale of an operation, a binding sale agreement is needed before a provision can be recognized