Chapter 13 Provisions

Question 1

Provisions (IAS 37)

Answer 1

A provision is a liability of uncertain timing or amount.

Question 2

Recognition

Answer 2

The recognition is the same in the Conceptual Framework for all liabilities:

1. When an entity has a present obligation (legal or constructive) as a result of a past event.
2. It is probable that an outflow of economic resources will be required to settle the obligation.
3. A reliable estimate can be made of the amount of the obligation.

Provisions are reviewed each year and adjusted to reflect the current best estimate.

Question 3

Legal and constructive obligations

Answer 3

An obligation can either be legal or constructive.

A legal obligation is one that derives from a contract, legislation or any other operation of law.

A constructive obligation is an obligation that derives from the actions of an entity:

1. From an established pattern of past practice.
2. As a result the entity has created a valid expectation in other parties that it will discharge those responsibilities.

Question 4

Measurement

Answer 4

The amount recognised as a provision is the best estimate of the expenditure required to settle the obligation at the end of the reporting period.

Provisions are discounted where the time VFM is material.

Question 5

Uncertainties

Answer 5

Where the provision involves a large population of items:

1. Use expected values.

Where a single obligation is being measured:

2. The individual most likely outcome may be the best evidence of the liability.

Question 6

Contingent liabilities (IAS 37)

Answer 6

A contingent liability is either:-
1. A possible obligation arising from past events whose existence will be confirmed by the occurrence of one or more uncertain future events not wholly within the control of the entity.

2. A present obligation that arises from past events but is not recognised because:
   - it is not probable that an outflow of economic benefits will be required to settle the amount of the obligation cannot be measured with sufficient reliability.

Question 7

Recognition

Answer 7

A contingent liability is not recognised. A contingent liability is disclosed unless the possibility of an outflow of economic benefits is remote.

Question 8

Disclosure

Answer 8

An entity must disclose at the end of the reporting period the following:-

1. The nature of the contingent liability
2. An estimate of its financial effect
3. An indication of the uncertainties relating to the amount or timing of any outflow
4. The possibility of any reimbursement.

Question 9

Contingent assets (IAS 37)

Answer 9

A contingent asset is a possible asset arising from past events whose existence will only be confirmed by the occurrence of one or more uncertain future events not wholly within the control of the entity.

Question 10

Recognition

Answer 10

A contingent asset is not recognised because it could result in the recognition of profits that may never be realised.

A contingent asset is disclosed where an inflow of economic benefits is probable.

Question 11

Disclosure

Answer 11

A brief description of the nature of the contingent asset at the end of the reporting period

Where practicable, an estimate of the financial effect.

Question 12

Events after the reporting period (IAS 10)

Answer 12

Events, favourable and unfavourable occur between the end of the reporting period and the date when the financial statements are authorised for issue.

Question 13

Adjusting events after the reporting period

Answer 13

Provide evidence of conditions that existed at the end of the reporting period.

The financial statements are amended.

Question 14

Non adjusting events after the reporting period

Answer 14

Indicative of conditions that arose after the end of the reporting period.

The financial statements are not amended.

If considered material, disclosure is

• the nature of the event
• an estimate of its financial effect

If an event after the reporting period indicates that the business is not a going concern (liquidated or cease trading), the entity’s financial statements must be adjusted to reflect the entity is not a going concern.