Provisions, Contingent liabilities, Assets. Events after SOFP date.

Question 1

What is a provision?

Answer 1

A liability of uncertain amount/timing.

Question 2

When should you recognise a provision?

Answer 2

• An entity has a present obligation (legal/constructive) due to a past event.
• probable (more likely then not) that an outflow of resourced embodying economic benefits will be required to settle the obligation.
• A reliable estimate can be made of the amount of the obligation.

Question 3

How to measure a provision?

Answer 3

• Amount required should be the best estimate of the expenditure required to settle the present obligation at reporting date.
• best estimate is determined by management based on similar transactions in the past and advice of independent experts.
• provision should be discounted to present value where the effect of this is material. This will subsequently be unwound.
• if it is a one-off event you take the most likely outcome anything over 50%.
  -if it is a large population of events then you take the weighted average cost of capital

Question 4

How to account for a provision?

Answer 4

Dr Expenses (P&L) X
Cr Provision (SOFP) X

relevant expense category will depend upon the subject of the provision (e.g. warranty claim may be in cost of sales)

Dr entry for provision for dismantling costs would go to PPE and would be released to P&L via depreciation.

Question 5

How do you account for a change in provisions?

Answer 5

Provisions should be reviewed at each reporting date. If no longer meets criteria should be derecognised.

Dr Provisions (SOFP) X
Cr Expense P&L X

Question 6

How to account for the use of a provision?

Answer 6

a provision may only be used for the expense it was originally created for, when expenditure incurred:

Dr Provisions (SOFP) X
Cr Cash X

any difference between the opening provision and the amount paid should be derecognised in the P&L.

Question 7

What is an onerous contract?

Answer 7

A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits to be received under it.

Question 8

How to account for an onerous contract?

Answer 8

Provision should be recognised as an expense in the P&L in the period the contract becomes onerous.

a best estimate of the provision for an onerous contact, the entity should use cost - any benefit.

Question 9

How to provision for reconstruction?

Answer 9

Provision may only be made if a detailed, formal and approved plan exists that has been announced to those affected. (generally employees).

should include direct expenditure arising from restricting.

Exclude any costs associated with ongoing activities such as relocating and retraining staff as they can be provided for.

Question 10

For each class of provision what should be disclosed?

Answer 10

Brief description of the nature of obligation.
Expected timing of any resulting outflows. (including any indication about uncertainties).

Question 11

What is the treatment of uncertain liabilities?

Answer 11

if <5% then ignore.
if 5%-50% then disclose as a contingent liability
if probably that more then 50% then assume all criteria has been met.

Question 12

What should you disclose about a contingent liability?

Answer 12

• description of the nature.
• estimate of the financial effect (if possible)
• indication of uncertainties relating to the amount of timing of any outflow.
• possible reimbursements
• just note any debits and credits (even though not accounted for)

Question 13

What is the treatment of an uncertain asset?

Answer 13

if <5% then ignore.
If 5%-50% then ignore
if 50%-95% then disclose as a contingent asset.

Question 14

what should you disclose about a contingent asset?

Answer 14

• description of the nature
• where predictable an estimate of the financial effect.

Question 15

Why is there a more cautious treatment for a liability?

Answer 15

This reflects the prudence concept - if in doubt always make your financial statements look worse then better.

Question 16

What is a reimbursement?

Answer 16

when a company settles a claim, it is reimbursed for the costs by insurer/supplier.

Question 17

What to do if settlement of claim is virtually certain/probable?

Answer 17

• Asset and liability must be disclosed separately on SOFP.
• P&L amounts may be netted off
• The amount of the asset may not exceed the amount of the provision.

Question 18

What is wrong with an event after SOFP date?

Answer 18

It can be defined as a material event occurring between the reporting date and the date which the financial statements are authorised for issue.

Question 19

What are some examples of adjusting events?

Answer 19

• settlement after the reporting date of court case which confirms a year end obligation.
• bankruptcy of a customer after the reporting date that confirms a year end debt is irrecoverable.

Question 20

Why would you ever disclose a non-adjusting event?

Answer 20

if they are going concern conditions then should adjust financial statements to present on the breakup basis.

if they are material, they should be disclosed in a note describing the nature of the event and an estimate of financial effect.

Question 21

What are some examples of non-adjusting events?

Answer 21

• announcing a plan to discontinue an operation
• destruction of assets after the reporting date due to fire/flood.

Question 22

How should you disclose dividends?

Answer 22

They should be proposed or declared after the reporting period and are not classified as an adjusting event.

They should however be disclosed in the notes to the financial statements.

Question 23

What is a contingent liability?

Answer 23

a potential liability that may /may not occur depending on the result of a future event.