Unit 5: Accounting for Current Liabilities

Question 1

(T/F). IAS 37, Provisions, Contingent Liabilities and Contingent Assets, does not apply to financial instruments (including guarantees) that are within the scope of IFRS 9, Financial Instruments.

Answer 1

True.

Question 2

(T/F). IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) does not apply to executory contracts unless they are onerous.

Answer 2

True.

Question 3

A ______ is a liability of uncertain timing or amount.

Answer 3

provision

Question 4

A ______ obligation is an obligation that derives from:

(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.

Answer 4

legal obligation

Question 5

A _______ _________ is:

(a) a possible obligation that arises from past events and 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; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.

Answer 5

contingent liability

Question 6

(T/F). A constructive obligation is an obligation that derives from an entity’s actions where by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

Answer 6

True.

Question 7

A ________ is a programme that is planned and controlled by management, and materially changes either:

(a) the scope of a business undertaken by an entity; or
(b) the manner in which that business is conducted.

Answer 7

restructuring

Question 8

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

Answer 8

Onerous contract.

Question 9

(T/F). A contingent asset need not arise from past events, but its 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.

Answer 9

False. A contingent asset is a possible asset that arises from past events.

Question 10

_______ can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement.

Answer 10

Provisions.

Question 11

When can a provision be recognized?

Answer 11

When the following conditions are met:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.

Question 12

(T/F). In a general sense, all provisions are contingent because they are uncertain in timing or amount.

Answer 12

True.

Question 13

_______ are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

Answer 13

Provisions.

Question 14

(T/F). Contingent liabilities are recognised as liabilities because they are either:

(i) possible obligations, as it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources embodying economic benefits; or
(ii) present obligations that do not meet the recognition criteria in this Standard (because either it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made).

Answer 14

False; contingent liabilities are NOT recognized as liabilities for the aforementioned reasons.

Question 15

(T/F). In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period.

Answer 15

True.

Question 16

(T/F). The only liabilities recognised in an entity’s statement of financial position are those that exist at the end of the reporting period.

Answer 16

True.

Question 17

(T/F). For reporting purposes, it is necessary to know the identity of the party to whom the obligation is owed.

Answer 17

False.

Question 18

(T/F). An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act (for example, a sufficiently specific public statement) by the entity gives rise to a constructive obligation.

Answer 18

True.

Question 19

Where it is not probable that a present obligation exists, an entity discloses a _________ __________, unless the possibility of an outflow of resources embodying economic benefits is remote.

Answer 19

contingent liability

Question 20

(T/F). An entity shall not recognise a contingent liability.

Answer 20

True. A contingent liability must only be disclosed.

Question 21

If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, the entity must recognize a _______.

Answer 21

provision.

Question 22

_________ usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.

Answer 22

Contingent assets

Question 23

Which of the following statements are true?
(A) Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised;
(B) However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

Answer 23

Both statements are true.

Question 24

Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is ________ _______.

Answer 24

“expected value”.

Question 25

(T/F). Gains from the expected disposal of assets shall not be taken into account in measuring a provision.

Answer 25

True.
Instead, an enterprise recognises gains on expected disposals of assets at the time specified by the Accounting Standard dealing with the assets concerned.

Question 26

If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a ________.

Answer 26

provision.

Question 27

(T/F). Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation.

Answer 27

True.

Question 28

(T/F). A provision shall be used only for expenditures for which the provision was originally recognised.

Answer 28

True.

Question 29

An entity shall disclose the following for each class of provision:

(a) a ____ ________ of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;
(b) an indication of the uncertainties about the ______ or _______ of those outflows; and
(c) the amount of any expected _________, stating the amount of any asset that has been recognised for that expected reimbursement.

Answer 29

(a) a [brief description] of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;
(b) an indication of the uncertainties about the [amount] or [timing] of those outflows; and
(c) the amount of any expected [reimbursement], stating the amount of any asset that has been recognised for that expected reimbursement.

Question 30

Financial liabilities that are _____ for ______ are financial liabilities that are incurred with an intention to repurchase them in the near term.

Answer 30

Financial liabilities that are held for trading.