Provisions and events after the reporting period

Question 1

Provision

Answer 1

A liability of certain timing or amount, must be recognised when:

An entity has a present obligation as a result of past events.
It is probable (>50%) that an economic outflow will be required.
A reliable estimate can be made

Question 2

Legal and constructive obligation

Answer 2

Legal = due to a contract, legislation or law
Constructive = derives from the entity's actions where from past events have taken responsibility and as a result created a valid expectation to other parties it will have the same responsibility

Question 3

Future operating losses

Restructuring

Answer 3

Future operating losses - not to be recognised as a provision as it does not meet the conceptual framework

Restructuring - provision only when it has an obligation (detailed formal plans and valid expectation to those affected it will be carried out)

Question 4

Warranty provision

Decommissioning costs

Onerous contracts

Answer 4

Warranty provision - selling goods under a warranty creates a ‘legal obligation’, provision should be made under best estimates of costs

Decommissioning costs - Only if there is an obligation (i.e. part of their agreement), if cost relates to a NCA then it can be included in the cost and depreciated as normal

Onerous contracts - where the costs to meet obligations is greater than revenue received if so the present obligation should be a provision

Question 5

Contingent liability

Answer 5

A possible (<50%) obligation which existence will be confirmed by the occurrence of 1 or more uncertain future events outside of the entity’s control; or

an existing obligation from past events which is not probable or because the amount cannot be easily measured

ONLY DISCLOSED IN NOTES not on balance sheet

Question 6

Contingent liability disclosures

Answer 6

Description of nature
Estimate of financial impact
Indication of the uncertainties
Possibility of any reimbursement

Question 7

Contingent asset

Answer 7

If <50% no disclosure

If >50% then disclose in notes ONLY

Question 8

Adjusting and non adjusting events

Answer 8

Adjusting - when info is known about a condition in the accounts (debtor gone bankrupt, court case decision etc)

Non adjusting - conditions after accounts (decline in market value, fire after reporting date)