S1 - liabilities Flashcards
what is the liability definition test
a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow form the entity of resources embodying economic benefits
what is the liability recognition test
Recognised in SOFP when - recognition test
it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and
The amount at which the settlement will take place can be measured reliably
Can pass the definition test but fail the recognition test
what in liability uncertainty
we know a liability exists but the amount isn’t certain so we can make a provision for the best estimate
Contingent liability exists where the obligation to pay is dependent on a future event
Clear subjectivity can lead to manipulation
what is big bath accounting
IAS 37 aims to prevent this
Accounting team knowingly manipulating its income statement to make poor results look even worse in order to make future results appear better
Bigger provision = charge against profit
Smaller provision = credit to profit
what is the three criteria approach
recognised when: - three criteria approach
There is a liability - legal or constructive
Present obligation from past event (no alternative to settling the event)
Probable outflow
Reliable estimate can be made of the amount
disclose rather than recognise if its a possible obligation - one or more of the requirements for a provision are not met
what are deprecation and bad debts
not considered to be provisions
Reduce carrying value of the related asset
what is the double entry for provisions
dr income statement
Cr provisions on SOFP
what is the measurement for provisions
recognition to be the best estimate required to settle obligation
Provision for one offs
Clean up, restructuring, lawsuit
Measured at most likely amounts
Provision for large populations
Warranties, refunds
Measured at a probability weighted expected value
what are onerous contracts
Where unavoidable costs of fulfilling the contract exceed the revenues to be received and where the entity would have to pay compensation if the contract was not fulfilled
what are restructuring provisions
Constrictive obligation arises when an entity has a detailed formal plan for the restructuring, has raised valid expectation that it will carry it out by starting to implement it or announcing main features
Should only include costs directly arising form the restructuring
what are environmental liabiltiites and decommissioning costs
Obliged to carry out restorative work or rectify environmental damage
Decommissioning cost often relates to non current assets and is added to the cost of it by Dr non current asset , Cr provision for environmental costs
what are contingent liabilities
not to be recognised in SOFP
Only to be disclosed unless possibility of transfer is remote
Include nature, uncertainties expected to affect final outcome and estimate of financial effect
