Accounting for Liabilities

Question 1

What type of liability is corporation tax?

Answer 1

A current liability

Question 2

How do you account for corporation tax?

Answer 2

The Initial tax journal is estimated meaning you could have under provisioned (too little) or over provisioned (too much).

Dr Income tax expense
Cr Taxation payable

Question 3

How is a lease liability measured?

Answer 3

The present value of future lease payments

Question 4

What is the interest rate implicit in the lease?

Answer 4

The discount rate at which the present value of the minimum lease payments and the residual value would be equal to the fair value of the leased asset.

Question 5

How is the right of use asset initially measured?

Answer 5

The right of use asset is initially measured at cost.

This cost will be the present value of the future lease payments as per the lease liability

Question 6

How do you subsequently measure a lease?

Answer 6

The right of use asset will usually be measured at cost less depreciation and impairments.

Question 7

How is a leased asset depreciated?

Answer 7

Over the shorter of the lease term and the useful life of the asset. If the entity becomes the legal owner at the end of the term, it is depreciated over the useful life

Question 8

What is the incremental borrowing rate?

Answer 8

The rate of interest that the lessee would have to pay on a similar lease

Question 9

What happens to a low value asset or short-term lease as per IFRS16?

Answer 9

They are expenses to the SPL (on a straight-line basis)

Question 10

What is a provision?

Answer 10

A type of liability that is of uncertain timing or amount

Question 11

When do you recognise a provision?

Answer 11

If it is:
1. A present obligation as a result of a past event.
2. Probable that an outflow of economic resources will be required to settle the obligation, and
3. A reliable estimate can be made of the amount of obligation

Question 12

What is a constructive obligation?

Answer 12

An obligation derived from the actions of an entity where:

a) An established pattern of past practice, published policies or a specific statement the entity has indicated to other parties that it will accept certain responsibilities, and

b) As a result the entity has created a valid expectation in other parties that it will discharge those responsibilities.

Question 13

What is probable?

Answer 13

More than a 50% chance it will occur

Question 14

What is a contingent liability?

Answer 14

1. A possible obligation arising from past events whose existance will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity, OR
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 an obligation, or
   - the amount of obligation cannot be measured reliably

Question 15

When is a contingent asset recognised?

Answer 15

If the realisation is only probable

Question 16

What is the definition of a Lease?

Answer 16

A contract that conveys the right to use an asset for a period of time in exchange for consideration.

Question 17

What is the Definition of a Right of use Asset?

Answer 17

An asset that represents a lessee’s right to use an underlying asset for a period of time (the lease term).

Question 18

What is the difference between a lease of more and less than 12 months and how each are accounted for in the accounts?

Answer 18

A lease is where you have a contract that conveys the right to use an asset for a period of time in exchange for consideration.

A short lease of 12 months or less is treated as an expense in the SPL with any accrual or prepayment recognised in the SOFP.

For leases of more than 12 months then a right of use asset is capitalised on the SOFP and a lease liability recognised on the SOFP as well. This will be recognised at the present value of the future lease payments. Once the asset acquired is capitalised it is then depreciated over the shorter of its useful life or the term of the lease.The liability is recognised and increased by interest amounts. These are based on the interest rate implicit in the lease and as well as increasing the liability will give a finance cost in the SPL. The lease liability will be reduced by repayments made to the lessor.

Question 19

Whats the accounting treatment for Assets and Liabilities in a likelihood scenario of:

Virtually certain
Probable
Possible
Remote

Answer 19

Asset:
Accounted for – Asset
Disclosed – Contingent Asset
No action taken
No action taken

Liability:
Accounted for – Liability
Accounted for - Provision
Disclosed – Contingent Liability
No action taken