Provisions, contingencies and events after the reporting period Flashcards
What is a provision and when should it be recognised according to IAS 37?
A liability of uncertain timing or amount
Present obligation as a result of a past event
Probable outflow of economic resources to settle
Reliable estimate of amount
What is a constructive obligation?
Derives from entity’s actions where an established pattern of past practice has created a valid expectation on the part of those other parties that will discharge the responsibilities
What is a probable outflow of resources?
Greater than 50% chance they will have to settle
What is a reliable estimate?
Single obligation - most likely outcome
Large population - expected value
Provision should be discounted to present value and reviewed at each reporting period
What is an onerous contract?
Unavoidable cost to meet obligation exceeds economic benefit
Lowest net cost of fulfilling contract
Should record a provision
What is restructuring and when can it be made into a constructive contract?
Sale/termination of a line of business, closure of location, relocation, or changes in management structure
Detailed formal plan
Raise valid expectation to start implementing/announcing
When is a sale obligation raised?
When there is a binding sale agreement
What should a provision include?
Direct expenditure which is both necessarily entailed and not associated with ongoing activities
What is a decommissioning provision and how is it treated?
Provision for dismantling at the end of a contract
Recognise amount as asset and write off over useful life
Calculate the present value
What is a contingent liability?
A possible obligation arising from past events whose existence is confirmed by an uncertain future event, or
A present obligation from past events that is not recognised because it is not probable and the amount cannot be measured with sufficient reliablity
Where should contingent liabilities be recognised?
In disclosure notes to FS
What is needed for each class of contingent liability?
Nature
Estimate of financial effect
Uncertainties
Reimbursement
What is a contingent asset?
A possible asset arising from past events whose existence is confirmed by an uncertain future event
When is a contingent asset recognised?
When virtually certain realisation of economic benefit
Assessed continually
Measured reliably
When is a contingent asset disclosed and what is required?
When economic benefit is probable
Nature
Financial effect
What are events after the reporting period?
Events that occur between the end of the reporting period and the date when the financial statements are authorised for issue
What is an adjusting event and some examples?
Conditions that existed at the end of the reporting period
Settlement of outstanding court case
Bankruptcy of customer
Sale of inventory at below cost
Receipt of valuation indicating impairment of PPE
What is a non-adjusting event and some examples?
Conditions that arose after the reporting period
Fire/flood that damages assets
Fall in market value of investments
Major asset purchase
Dividends declared after reporting period
What is the UK GAAP comparison for events after the reporting period?
IAS10 - dividends declared after year end are non-adjusting and must be disclosed
FRS 102 - dividend not a liability but possibly presented as segregated component of retained earnings
