week 6

Question 1

liability

Answer 1

a present obligation of the entity arising from past event
the settlement of the obligation is expected to result in an outflow of resources embodying economic benefits from the entity

Question 2

provision

Answer 2

a liability of uncertain timing or amount.

Question 3

an essential characteristic of a liability is that the entity has a

Answer 3

present obligation

Question 4

Present obligation may be

Answer 4

legally enforceable e.g. b/c of contract
OR
equitable: arising from normal business or custom
constructive: arising from established pattern of past practice

Question 5

Constructive obligation

Answer 5

established pattern of past practice, published policies, the entity has indicated to other parties that it will accept certain responsibilities; and

as a result, the entity has created a valid expectation in other parties that it will discharge those responsibilities.

Question 6

contingent liability

first definition

Answer 6

• a possible obligation that arises from past events. The obligation will only exist by the the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity

Question 7

contingent liability

2nd definition

Answer 7

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

Question 8

contingent liability are not

Answer 8

recognised in the financial statements because contingent liabilities do not meet the recognition criteria.

Question 9

contingent liabilities must

Answer 9

be disclosed in the notes unless the possibility of outflow in settlement is remote

Question 10

When should a provision be recognised

Answer 10

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

Question 11

past event that leads to a present obligation is called a

Answer 11

obligating event

Question 12

for an event to be an obligating event

Answer 12

for an event to be an obligating event the entity must have no realistic alternative to settling the obligation created by the event.

• legal obligation this is because the settlement of the obligation can be enforced by law.
• constructive obligation the event needs to create a valid expectation in other parties that the entity will discharge the obligation.

Question 13

convertible preference shares

Answer 13

gives holder the right to convert to ordinary shares, holder has the right

Question 14

participating preference shares

Answer 14

gives the holder the right to extra dividends

Question 15

Converting preference

Answer 15

terms of issue, shares must convert to ordinary shares

Question 16

Typical provisions

Answer 16

warranty
restructuring
onerous contracts

employee benefits are not provisions