Provisions and events after the reporting period Flashcards
what is a liability
a deduction from current year profits for a liability arising from past events that will be paid for in the future
why are provisions required
accruals accounting
expenses should be recognised when they occur not when they are paid for
what accounting standard deals with provisions
IAS 37 Provisions, contingent liabilities and contingent assets
how does a provision and a liability differ
provisions are liabilities with a degree of uncertainty either about timing or amount
what are the two types of obligations
legal (required by law)
constructive (created an expectation with other people from past actions)
example of constructive obligation
Known store policy for refunding dissatisfied customers
What 3 criteria need to be met for provision to be recognised
- present obligation as a result of past event
- probable outflow of resources required to settle the obligation (>50%)
- reliable estimate of the amount
How are provisions measured
discounted where effect is material
expected value/range of possible outcomes
what are the conditions to recognise a restructuring provision
- present obligation
- direct costs related back to restructure
examples of a present obligations for restructuring provisions
plan published outlining
- business effected
- employees effected
- expenditures that will be undertaken
- timing of implementation
(plan raises expectations of those effected)
what costs qualify as restructuring provision costs
directly and necessarily caused by restructuring, not associated with ongoing operations
redundancy costs
dismantling costs
terminating leases cost
examples of costs excluded from being allowable for restructuring provisions
employee retraining and relocation (benefits ongoing business)
marketing costs
what is the criteria for a reimbursement to be recognised
virtually certain that it will be received
what is an onerous contract
a contract with unavoidable costs that exceed the economic benefits expected to be received
e.g. lease remaining on building, but moving office
to what value are provisions for onerous contracts recognised
the amount recognised will be the amount it would cost to continue paying going forward
why are onerous contracts allowable to be recognised as provisions
- present obligation as result of past event
- probable outflow of resources
- reliable estimate of amount
when should provisions be reviewed
at the end of each reporting period and adjusted if necessary
what does it mean to reverse a provision
they transfer of resources will no longer be provided to settle the provision
what is a contingent liability
a POSSIBLE obligation arising from past events, whose existence depends on UNCERTAIN future event
OR
a present obligation arising from past events that is uncertain how much will be required to settle the obligation
Example of a contingent liability
legal case - uncertain how it will pay out
what is the accounting treatment for contingent liabilities
should not be recognised in financial statements
should be disclosed in notes
- brief description
- estimate of financial effects
- indication of uncertainties
what is a contingent asset
possible asset arising from past events whose existence depends on an UNCERTAIN future event
what is the accounting treatment of a contingent asset
PRUDENT
DO NOT RECOGNISE
Probable (>50%) = disclose in notes
Not Probable (<50%) = no note
what disclosures are required under ias 37
carrying amount at beginning and end of period
how provision increased or decreased throughout the period
brief description (expected timing and indication of uncertainties involved)
