Chapter 37 - Contingencies

Question 1

What are the three criteria required to recognize a provision?

Answer 1

Present obligation from a past event (legal or constructive)
Probable outflow of resources (>50%)
Reliable estimate can be made

Question 2

What happens if any provision recognition criterion is not met?

Answer 2

No provision recognized
Possible disclosure instead

Question 3

What are the three probability categories under IAS 37?

Answer 3

Remote → No recognition or disclosure
Possible → Note disclosure only
Probable (>50%) → Recognize a provision (if measurable)

Question 4

How should provisions be measured?

Answer 4

Based on the most reliable estimate
Use expected value for large populations
Use midpoint for continuous, equally likely ranges
Use most likely outcome for a single obligation

Question 5

What method is used for large populations of obligations?

Answer 5

Expected value method (probability-weighted)

Question 6

What method is used for a continuous range of equally likely outcomes?

Answer 6

Midpoint of the range

Question 7

What method is used for single obligations?

Answer 7

Most likely outcome (unless distribution is skewed)

Question 8

What must be disclosed when a provision is recognized?

Answer 8

Nature of obligation
Expected timing of payments
Uncertainties in amount or timing
Expected reimbursements
Movements during the period (additions, used amounts, reversals, discounting)

Question 9

When can contingent assets be recognized?

Answer 9

Recognized only when inflow is virtually certain
Disclosed only when inflow is probable
No disclosure if inflow is less than probable

Question 10

What are the three steps in the provision decision flow?

Answer 10

• Is there a present obligation?
• Is the outflow probable?
• Can the amount be reliably estimated?

Question 11

What is required for a “reliable estimate” under IAS 37?

Answer 11

Use of estimates does not reduce reliability
Rare cases exist where no estimate is possible
A range of outcomes is usually identifiable

Question 12

ASPE - Nature of the Contingency

Answer 12

Brief, clear description of what the contingency relates to.

Question 13

ASPE - Explanation of Uncertainty

Answer 13

Events or conditions creating uncertainty. Factors that will influence the final outcome.

Question 14

ASPE - Financial Statement Impact

Answer 14

Potential impact on assets, liabilities, or equity if the contingency is realized.

Question 15

ASPE - Accounting Policy Disclosure

Answer 15

Policies for recognizing or measuring contingencies when applicable. When loss contingencies are accrued vs. only disclosed.

Question 16

ASPE - Amount Accrued (if any)

Answer 16

If a loss is probable and measurable, disclose: The amount recognized. Where it appears in the financial statements.

Question 17

ASPE - Possibility of Additional Losses

Answer 17

If further losses are reasonably possible, disclose: Estimated additional losses or a statement that the estimate cannot be made.

Question 18

ASPE - Changes in Circumstances

Answer 18

Significant updates during the period that affect: Likelihood of loss Estimated amounts.

Question 19

ASPE - Omission in Case of Prejudice

Answer 19

ASPE permits nondisclosure only when full disclosure would seriously prejudice the entity’s position. If used, disclose: General nature of the contingency. Reason for nondisclosure.

Question 20

IFRS - Nature of Obligation

Answer 20

Description of the legal or constructive obligation.

Question 21

IFRS - Expected Timing of Settlement

Answer 21

When the outflow is expected: Within a year Beyond a year Over multiple periods.

Question 22

IFRS - Uncertainties in Amount or Timing

Answer 22

Main sources of estimation uncertainty. Dependence on external decisions (e.g., courts, regulators).

Question 23

IFRS - Key Assumptions and Estimates

Answer 23

Assumptions underlying measurement. Expected changes in these assumptions.

Question 24

IFRS - Reimbursements

Answer 24

Expected reimbursements (e.g., insurance). Conditions under which reimbursement will occur. Amount of reimbursement recognized or disclosed.

Question 25

IFRS - Movements in Provision Balances

Answer 25

Provide a reconciliation showing: Opening balance Additional provisions recognized Provisions used (amounts charged against the provision) Unused amounts reversed Changes from discounting or changes in discount rates.

Question 26

IFRS - Probability Assessment (for Contingent Liabilities)

Answer 26

Why no provision was recognized. Judgment that outflow is not probable.

Question 27

IFRS - Contingent Assets

Answer 27

Disclose only if an inflow is probable. Describe: Nature of the contingent asset Expected financial effect (without overstating certainty).