Provisions, Contingent Liabilities + Contingent Assets

Question 1

What is a provision?
What do we do for a provision? Think work
What is the double entry?
What is a liability?(3)

Answer 1

A liability of uncertain timings or amounts
Accrue
Dr Expense Cr Provision
Present obligation, from past events, outflow of economic benefits

Question 2

IAS 37 Recognition of Provisions
What are the 3 criteria that must be met?
What is a constructive obligation?
How does the entity create this?

Answer 2

Present obligation, legal or constructive, arising from past events
Probable outflow of economic benefits to settle obligation
Reliable estimate can be made for amount of obligation

A valid expectation

Past practices, published policies, sufficiently specific current statement entity indicated will accept certain responsibilities

Question 3

Accounting Treatment
Initially what do we do?
What if it’s a dismantling cost?
What do we do in the subsequent years?3 steps
What’s the double entry for the movement? Increase? Decrease?

Answer 3

Dr Expense Cr Provision
Dr Asset/Receivable Cr Provision

Calculate provision for year end
Compare closing to opening
Account for movement

Dr Expense Cr Provision
Dr Provision Cr Expense

Question 4

Disclosure in Accounts
Where do you find provisions in the profit or loss?
In the SFP?
What happens if provision is initially measured measured at discount or PV? What’s the double entry?
What is charged of a provision to P+L?
What is charged to SFP?

Answer 4

Provision expense after expenses
Under liabilities CL if under 12m
Unwind discounting closer to payment
Dr Fixed Costs Cr Provision
Movement
The whole amount each year

Question 5

Calculate Provisions
If it’s a single obligation how is this estimated?
If it is a group obligation what is the approach?
How does this work?

Answer 5

Management judgement
Expected value approach
Each outcome x the weighted probability

Question 6

Contingent Liabilities
It is a?
Arises from?
Existence confirmed by?
That aren’t?

It’s a present obligation arising from past events but is not recognised because?

Answer 6

Possible obligation
Past events
Occurrence or no occurrence of one or more events
Wholly within control of the entity

Not probable that outflow will occur
No reasonable estimate of outflow

Question 7

Contingent Liability
What is it not?
What information is disclosed in the note?(3)
How is this treated if?
Virtually Certain
Probable
Possible
Remote

Answer 7

Recognised
Nature of contingency
Uncertainties expected to affect the ultimate outcome
Estimate of potential financial effect

Virtually certain and probably are provisions and recognised
Possible disclosed in note
Remote ignored

Question 8

Contingent Assets
How is this treated?
What is the description? (Same as liability but do it from memory)
How do we treat is :
Virtually certain
Probable
Possible
Remote

What’s the double entry for virtually certain?

Answer 8

Prudently
Possible asset arising from past event occurrence or non occurrence of which confirmed by one or more uncertain future events not wholly in control of entity

Recognise
Disclose in note
Ignore
Ignore

Dr Asset/Receivable Cr P+L