W4 - Provisions, Contingent Liabilities and Contingent Assets Flashcards
What is a liability?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
What is provisions?
Provisions are liabilities of uncertain timing or amount
Provisions are therefore a subset of liabilities
When to recognise provisions?
When an entity has a present obligation as a result of a past event;
it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
a reliable estimate can be made of the amount of the obligation
What should be the probability of the provision to be accounted?
above 50%, more likely than not
How do you account for provisions? (DR/CR)
Initially:
DR: P&L
CR: Provision
Adjust at the end of each reporting period. When the relating provision ends:
DR: Provision
CR: Bank
How do you measure restructuring provisions?
The entity must have a present obligation (legal or constructive) to restructure, e.g.:
–> Evidence must exist
–> It must have been communicated to those affected
Only costs directly and necessarily caused by the restructuring may be included in the provision
i.e. not associated with the ongoing activities of the entity
Examples of costs included in the provision
Costs of terminating leases
Disposing of surplus inventories
Remuneration of employees engaged in restructuring activities
Costs of making employees redundant
Examples of costs excluded from the provision
Retraining or relocating the continuing staff
Marketing costs and costs related to investment in new systems and distribution networks
Operating losses
How do you measure onerous contract provisions?
Measurement of provision takes a rational approach:
The least net cost of exiting the contract, i.e. the lower of:
- the cost of fulfilling the contract, and
- any compensation or penalties arising from failure to fulfil the contract
What is a contingent liability and how do you account for it
Contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity’s control;
Disclosed in the notes account
Comment reconnaitre contingent liability? –> répondre non à une des trois questions pour reconnaitre une provision (present obligation, probable, mesurable)
