Provisions, contingencies and PBSE

Question 1

Definition and recognition (Provisions) IAS 37

Answer 1

A liability of uncertain timing or amount

Recognition:
Present obligation as a result of past events,
Probable >50% (resulting in outflow of economic benefits),
A reliable estimate can be made.

Present obligation = legal or constructive obligation.

Question 2

Provision measurement

Discounting?

Answer 2

Use best estimate.

If uncertainty use expected values (large population of items) if only 1 then use most likely.

If time value of money is material then discount rate should be pre-tax, reflect risk. When unwinding the discount put to P/L.

Question 3

Provision for operating losses, Onerous contracts, Restructuring

Answer 3

Cannot recognise future operating losses

Onerous (loss making) contracts = recognise the unavoidable costs = lower of cost to fulfill contract or penalty from failure to fulfill contract

Restructuring = is planned, controlled by management and material changes to the scope of business (i.e. sale or termination of business line, closure of locations, change in mgmt structure) can recognised when entity has a constructive obligation (detailed formal plan, valid expectation). If sale of an operation only when entered into a binding sale agreement. Recognise the cost and direct expenditure except retraining or relocation of staff, marketing, investment in new systems/distribution networks

Question 4

Contingent liabilities IAS 37

Answer 4

Either:

a) A possible obligation arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events (not wholly within the control of the entity).
b) A present obligation arising from past events but is not recognised because (i) it is not probable that an outflow will be required to settle the obligation; or (ii) the amount of the obligation cannot be reliably measured

Question 5

Contingent liability recognition (IAS 37)

Answer 5

Should not be recognised in the BS but should be disclosed in notes unless the possibility is remote.

They must disclose: 
Nature of liability 
Estimate of financial effect 
Indication of uncertainty (amount and timing)
Possibility of reimbursement

Question 6

Contingent asset (IAS 37)

Answer 6

A possible asset that arises from past events whose existence will be confirmed by the occurrence of one or more uncertain future events (not within entity’s control)

Only disclose in notes if probable (nothing in BS)
If not probable do nothing.

Question 7

Events after the reporting period (IAS 10)
Definition
Types of events

Answer 7

Those events that occur between the year end and the date that FS were authorised

2 types of events:

1) Adjusting events = provide evidence of conditions that existed at the year end of the reporting period = FS should be adjusted.
2) Non-adjusting events = Indicative of conditions that arose after the end of the reporting period = FS not adjusted but should be disclosed in notes.

Adjusting events include = discovery of fraud resulting in errors in FS, settlement of court case present at reporting date.

Question 8

Going concern (IAS 10)

Answer 8

If management determines after the reporting date that the reporting entity will be liquidated the FS should be adjusted so that they are not prepared on the going concern basis