Provisions, contingent liabilities and contingent assets

Question 1

Provision

Answer 1

a liability of uncertain timing or amount

Question 2

Liability

Answer 2

1. present obligation as a result of past events
2. settlement is expected to result in an outflow of resources (payment)

Question 3

obligating event

Answer 3

an event that creates a LEGAL or CONSTRUCTIVE obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation

Question 4

Legal obligations

Answer 4

1. an obligation that derives from:
   1.1 a contract (explicit/implicit);
   1.2 legislation; or other operation of law
2. an onerous contract is an example

Question 5

constructive obligation

Answer 5

1. exists when the entity has no realistic alternative to the transfer of economic benefits
2. for instance as a result of practice previously established, or published policy, or
3. an announcement made in terms of which a valid expectation has been created that the entity will indeed comply with its responsibilities

Question 6

contingent liability

Answer 6

1. a possible obligation depending on whether some uncertain future event occurs, or
2. a present obligation but payment is not probable or the amount cannot be measured reliably

Question 7

Contingent asset:

Answer 7

1. a possible asset that arises from past events, and
2. whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Question 8

Provision recognition (criteria)

Answer 8

1. there is a present obligation either legal or constructive at the reporting date that
2. Arising from past events; and
3. The settlement of which is expected to result in an outflow of economic resources
4. It is probably/more than likely that an outflow of economic resources
5. And a reliable estimate can be made of the amount

Question 9

Measurement of provisions

Answer 9

1. the best estimate of the amount required to settle the obligation at the reporting date
2. Measured before tax

Question 10

Best estimate takes into account

Answer 10

1. Risk and uncertainties
2. Future events
3. Expected disposal of assets

Question 11

Measurement of Changes in provisions

Answer 11

1. Provisions must be reviewed at end of each reporting period and adjusted to reflect the current best estimate.
2. Reversed if no longer probable.

Question 12

Measurement of Use of provisions

Answer 12

1. Provision shall be used only for expenditures for which the provision was originally recognised.

Question 13

Measurement of Future operating losses

Answer 13

Provisions shall not be recognised for future operating losses.

Question 14

Disclosure of classes of provisions

Answer 14

a) nature of the obligation and expected timing of outflows

b) indication of uncertainties about timing of those outflows.

c) Information on major assumptions on future events

d) amount of expected reimbursement, and asset recognised for that reimbursement

Question 15

Disclosure of movement in classes of provisions

Answer 15

a) Carrying amount at begin and end of period

b) Additional provisions during the period incl. increases

c) Amounts used during the period

d) Amounts reversed during period

e) Increases due to passage of time or change in discount rate

Question 16

Disclosure of Contingent liability

Answer 16

a) brief description of nature of the liability; and

b) if practical, an estimate of the financial effect

Question 17

Disclosure of Contingent asset

Answer 17

a) brief description of nature of the asset; and

b) if practical, an estimate of the financial effect