Week 5 IAS37 Provision and Contingencies IAS 10 Events after reporting period Flashcards
What is the IAS37 Provisions, Contingent Assets & Contingent Liabilities?
IAS37 Provisions, Contingent Assets & Contingent Liabilities Ensures appropriate recognition criteria and measurement bases are applied – no big bath provisions
Ensures sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.
What are provisions?
provisions are funds set aside to cover future expenses or liabilities that are likely to occur, but the exact cost is unknown.
what are CONTINGENT LIABILITIES?
A contingent liability is a liability that may occur depending on the outcome of an uncertain future event.
what is a liability?
A liability is a present obligation of the entity, arising from past events, the settlement of which is certain to result in an outflow from the entity of resources embodying economic benefits.
what is a provision?
A provision is a type of liability in the SOFP, also a present obligation, which is legal or constructive, arising from past events, of which payment is probable and can be estimated.
How do you recognise provisions?
Present Obligation
Legal – contractual
Constructive – valid expectation from past behaviour
Uncertain Timing or Amount
Arising from Past Event
Probable future outflow of economic benefits or settlement of obligation from the entity
Reliable measurement of cost or value
What are some exmaples of provisions?
reoroginsation costs
warranties
enviromental costs
major refits/refurbishments
legal cases agianst the company
losses on conratcs
how do you measure provisions?
The best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
Best estimate required to settle
Determined by judgement
Supplemented with information provided by experienced or independent experts
how do you estimate and make provisions for Large Population Events like Warranties ?
Weighted average of all possible outcomes using probabilities – expected value
Multiply number by amount by probability
If continuous range of outcomes, then use mid-point
A TV manufacturer has with a 1-year warranty. During the year, 100,000 units are sold. It is estimated that 1000 units will have a claim.
It is 70% likely there will be claims of £500 on 1000 units in the next year.
It is 30% likely there will be claims of £800 on 1000 units in the next year
How much should be provided for? what is the double entry?
Expect 70% to claim £500 on 1000 sales = £350,000
Expect 30% to claim £800 on 1000 sales = 240,000
DR Warranty expenses £590,000
CR Provision for Warranty Claims £590,000
When provision is utilised – following years – use the provision so no P&L effect
DR Provision for Warranty Claims xxxxx
CR Cash xxxxx
For single event claims like law suits or enviromentla clean ups how do we make a provison fo rit?
The best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
Most likely outcome whether that’s the higher or lower estimate
If more than one attempt might be needed to rectify, then provide the larger amount
A company has polluted a local beauty spot. The cost of clean-up may be £20,000. However, the clean-up is tricky and could be £40,000 if the first attempt is not enough.
What should they provide for? what is the double entry?
Provide the most likely amount of £40,000
DR Environmental Clean-up expense £40,000
CR Provision for Environmental Clean-up £40,000
When provision is utilised – following years – use the provision so no P&L effect
DR Provision for Environmental Clean-up xxxxx
CR Cash xxxxx
How is a provison meausred if it lasts longer than one year?
If the provision is payable in more than one year, then it is measured at net present value of future cash outflows
Regularly review and adjust the provision at every SOFP (balance sheet) date for any changes in expectations.
what is the double entry when a provision is reviewed and reduced and when it is increased?
When a provision is reviewed and reduced:
DR Provision for Warranty Claims
CR Warranty expenses
When a provision is increased:
DR Warranty expenses
CR Provision for Warranty Claims
How are the movements of provisons disclosed?
For each class of provision, an entity shall disclose:
the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing provisions;
(c) amounts used (ie incurred and charged against the provision) during the period;
(d) unused amounts reversed during the period; and
(e) the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate.
Comparative information is not required.