Provisions, Contingent Liabilities And Assets Flashcards
Provisions
Liability of uncertain timing or amount
Only recognize if there is a present obligation, legal or constructive, from past event. Probable that there will be an outflow and estimate reliable amount. Otherwise a contingent liability.
Constructive obligation is from an entities actions so it is expected from them.
Obligation can only exist if there is another party, although the other party’s identity need not be known.
Obligating event would be the event which creates a legal or constructive obligation, where the entity has no realistic alternative but settling the obligation. Thus cannot avoid it. Cannot be obligation for future events. A mere decision by management is not an obligating event.
Where a change in statute occurs, only when virtually certain draft legislation will be enacted, later date becomes date of obligating event.
More than 50% is a probable outflow, more likely than not. Look at total of similar obligations not single transactions.
Contingent liability
Possible liability arising from past event and whose existence will only be confirmed by the occurrence or non occurrence of one or more uncertain future event not wholly in control of the company.
Present obligation from past events but not recognized because no probable outflow or amount cannot be measured.
Only disclosed. Not disclosed if outflow remote. Must be reviewed regularly and provision should be raised where gone from possible to probable.
Joint and severally liable, amount probable would be provision remaining which would be possible will be a contingent liability.
Contingent asset
Possible asset from past events existence will only be confirmed by the occurrence or non occurrence of one or more future events not wholly in control of the company.
Asset should only be recognized if virtually certain will occur. Just disclose if probable.
Reimbursements
Only recognize as asset when virtually certain. If company does not retain the obligation to settle a liability if a third party fails to do so, there is no obligation. If not virtually certain only disclose expectation if probable. Thus where there is a primary obligation to settle the liability, include the reimbursement and the liability in the balance sheet.
Measurement of contingent assets and liabilities and provisions
Use best estimate to settle obligation at pre tax amount. Take into account risk and uncertainty by adjusting cash flows or discount rate. Can use highest probability of outcome or adjust for different possibilities and their probabilities.
Should be discounted at pre tax rate, interest increasing the provision as an expense.
Provision could form an asset like for a mine, which would have to be depreciated.
Changes in provisions
Review at each balance sheet date. Changes are changes in estimates, thus accounted for in period change takes place. Expenditure incurred income statement treated as settlement of a provision thus, if expenses more than provision it income statement treated as a change in estimate. Whole expense is debited to provision and then provision would be credited as change in estimate for differences.
Onerous contracts
Contact with unavoidable costs of meeting the obligation which exceeds benefits expected from contact. Must be in avoidable. Lower of cost of fulfilling the contract or penalties. Must first recognize an impairment loss in respect of such asset under contract and raise liability provision for remaining amount.
Definition of liability
Present obligation arising from past event the settlement of which will result in an outflow of resources.
