Week 5 Flashcards
What is the accounting equation?
Assets - liabilities = capital
What is the aim of IAS 37?
The key aim of IAS 37 is to ensure that provisions are only made where there are valid grounds for them.
How does IAS 37 define a provision?
A liability of uncertain timing or amount. A provision should be recognised when all of the following conditions are satisfied:
The entity has a present obligation (legal or constructive) as a result of a past event.
It is probable that an outflow of resources expressing economic benefits will be required to settle the obligation
A reliable estimate can be made of the amount of the obligation.
What is an obligating event?
A past event which leads to a present obligation. The entity must have no realistic alternative but to settle the obligation created by the event. This is when:
the obligation is legally enforceable
the event has given rise to a constructive obligation (entity has created a valid expectation that it will discharge the obligation even though this is not legally enforceable.
How do you measure a provision?
The amount of a provision should be the best estimate of the expenditure required to settle the obligation concerned.
If the effect of the time value of money is material, the amount of a provision should be calculated as the present value of the expenditure required to settle the obligation.
What are the specific applications of IAS 37?
Future operating losses - provisions should NOT be recognised for future operating losses.
Onerous contracts (the unavoidable costs of meeting the obligations under the contact exceeding the economic benefits expected to be received under it) - the present obligation under such a contract should be measured and recognised as a provision.
Restructuring costs - a provision for restructuring costs should be recognised only if the general recognition criteria of IAS37 are satisfied.
How does IAS 37 define a contingent liability?
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
A present obligation that arises from past events but is not recognised because the recognition criteria for a provision are not satisfied
In short words what is a provision and a contingent liability?
Provision = a liability that more likely will have to be paid at some time in the future.
Contingent liability = a liability that is unlikely to be paid (but might be)
How are provisions recorded in the FNST?
The amount must be included as a liability in the FNST.
Details must be given of any movement in the provision during the year.
Background info must be given about the provision together with details of any uncertainties regarding it’s outcome.
What is a contingent asset?
A possible asset 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.
These should not be recognised but should be disclosed in the notes if the inflow of economic benefits is judged to be probable.
Are contingent assets recorded?
Assets must never be overstated, an asset must only be included in the balance sheet (SOFP) if it is absolutely certain that future economic benefits will arise.
Where there is any uncertainty the asset must not be included in the balance sheet.
If it is more likely than not that a future benefit will arise, details of the contingent asset should be included in the notes.
What are the disclosure requirements of IAS 37?
For each class of provision in the FNST the entity should disclose:
The carrying amount at the beginning and end of the period
Additional provisions or increases made in the period
Amounts used and amounts reversed during the period
A brief description
How are proposed dividends recorded?
Prior to IAS 37, companies could make a provision in the FNST for dividends they were proposing to pay.
Under IAS 37, no provision should be made as at the balance sheet date there is no obligation to pay the dividends, only a proposal which needs to be agreed.
How are provisions for repairs recorded?
No provision can be made for repairs because there is no obligation to incur that future expenditure.
The can be solved under IAS 16 by splitting the asset into separate parts and depreciating them over their useful lives.
How are provisions for restructuring costs recorded?
A provision for costs should only be included if:
There is a detailed formal plan available
There must be a valid expectation of implementation by the people affected by the restructuring.
Where the restructuring involves a sale of a part of the business a provision should only be made if a binding sale agreement has been entered into.
