Provisions and events after the reporting period Flashcards
What is an event after the reporting period?
An event which occurs between the reporting date and the date when the financial statements are authorised for issue.
You only need to adjust the financial statements for an event after the reporting date if
-gives evidence about conditions at the reporting date
-impacts going concern
What do you do for an event after the reporting date if it does not impact going concern or give evidence about conditions at the reporting date?
If it is material, disclose it in the notes to the Financial Statements
What is a provision?
A liability of uncertain timing or amount
According to IAS37 Provisions, Contingent Liabilities and Contingent Assets, a provision is recognised if;
-there is a present obligation from a past event
-there is a probable outflow of economic benefits
-the probable outflow can be measured reliably
What is the accounting entry for a provision? And what is the entry for when it is settled?
Dr P&L (Expense)
Cr Provisions (SFP)
Dr Provisions (SFP)
Cr Cash (SFP)
What do you do with a provision at year end?
Re-estimate
What are the 2 types of obligations (something that cannot be avoided)?
A legal obligation arises from contracts, laws or legislation.
A constructive obligation arises when an entity’s past practices or published policies create an expectation that it will discharge certain responsibilities.
How does IAS37 treat future operating losses?
No obligation to incur future operating losses therefore no provision is recognised
What is an onerous contract? And how is it recorded?
Where unavoidable costs of the contract exceed the benefits that will be obtained. (Contractual obligation)
Lower of;
-cost of fulfilling the contract
-cost of terminating the contract
What criteria needs to be met to recognise restructuring? And what costs are recognised if an obligation exists?
-there is a detailed plan
-employees affected are aware of the plan
Provision should be recognised for the DIRECT costs of restructuring (cannot be for any future operating costs e.g. relocation of employee)
What is the double entry for decommissioning an asset?
Dr PPE (SFP)
Cr Provision (SFP)
How are provisions measured?
Best estimate of the expenditure required to settle the obligation at the reporting date
-for a single obligation (amount payable)
-for a large population of items (expected value)
If the effect of the time value of money is material, then the provision should be discounted to present value.
How are warranties treated?
In accordance with IAS37, a provision should be recognised.
If the customer has the OPTION to purchase the warranty separately, then it is a distinct performance obligation and falls under IFRS15 Revenue from Contracts with Customers
What are contingent assets?
-possible assets whose existence will only be confirmed by future events not controlled by the entity.
They are DISCLOSED in the financial statements if the probability of an economic inflow is PROBABLE
