Chapter 6

Question 1

What is provision

Answer 1

Provision is a liability of uncertain timing or amount

Question 2

Recognition criteria of provision

Answer 2

• present obligation - legal obligation (legislation / contract / law) & constructive obligation (expectations created through past practice)
• resulting from past event
• probable outflow of economic benefits
• reliable estimate - uncertain amount and timing

Question 3

Future operating losses can be avoided?

Answer 3

Yes, because:
* relates to future events
* can be avoided
* no obligation exists
* no provision is required

However, expectation of future losses is indicators of impairment

Question 4

Onerous contracts can be avoided?

Answer 4

Unavoided because:
* unavoidable cost exceed the expected benefits (会亏钱的contract), i.e, penalty, incremental cost to fulfill contract, dun want subscripe already but cannot cancel the subscription - do not get any benefits or return
* present obligation when entering the contract

Question 5

Future repair of assets can be avoided?

Answer 5

Yes, because:
* it can be avoided by selling the assets
* no present obligation
* so provision cannot be recognised

Question 6

Environmental provision can be avoided?

Answer 6

No, because:
* environmental damage already happened
* present legal / constructive obligation
* got material time value of money - provision is discounted to present value
* For exp: restoration / clean-up cost
* if expenditure results in future economic benefit, asset is recognised (can be capitalised), i.e, restoration cost for construct a oil rig

If construct PPE, incur dismantling cost (provision) more than 1 year, need to do discounting to PV

Ps: find Future value - unwinding of discount, PV - discounting

Question 7

Restructuring cost can be recognised as provision?

Answer 7

Restructuring provision should be recognised if:
* got detailed formal plan; AND
* communicated to all affected parties / entity has start to implement the plan
* thus, this raise valid expectations

Restructuring such as change of business location, sales / closure of business line

Relocation costs for staff cannot be recognised as it relates to the future operations

Question 8

Events after the reporting period: Favourable / Unfavourable events

Answer 8

Can adjusting:

• bankcruptcy coz it’s already got financial issue before reporting date
• stop operation coz going-concern no longer valid (break-up basis)
• announced tax rate coz it’s enacted / substantially enacted before the Y/E
• sale of inventory - NRV at reporting date
• discovery of fraud / error
• settlement after reporting date of a court case - value of obligations

Non-adjusting:
* dividend (ordinary shares) declared after year end
* announcing plan to discontinue operations

just adjust f/s, not retrospectively / prospectively

If adjusting then adjust financial statement, if non-adjusting then only disclose in the financial statements