Provisions and Contingent liabilities Flashcards
Provision
liability of uncertain timing or amount
liability
present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
obligation event
event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation
provision shall be recognized when
- entity has a present obligation as a result of a past event
- it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
- a reliable estimate can be made of the amount of the obligation
present obligation existence
exist if more likely than not
single obligations probability
outflow resources is more likely than not to occur (>50%)
group of similar obligations probability
probability is determined by considering the class of obligations as a whole (fulfilled even if ourflow probability for any one item is small)
Measurement of provisions
measured at the best estimate of the expenditure required to settle the present obligation. Where the effect of time value of money is material, amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation
Single obligation measurement
individual most likely outcome may be best estimate, however also consider other possible outcomes
Reimbursements
- shall be treated as a separate asset
- only recognized if ‘virtually certain’
changes in provisions
- shall be reviewed at the end of each reporting period and adjusted to reflect current best estimate
- no longer probable outflow of resources embody economic benefits will be required to settle obligation, provision shall be reversed
restructuring provisions criteria
- a present obligation must exist
- costs must be directly and necessarily caused by the restructuring and not associated with the ongoing activities of the entity
- if restructuring involves the sale of an operation, a binding sale agreement is needed before a provision can be recognized
contingent liability (meaning 1)
a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
Contingent liability (meaning 2)
a present obligation that arises from past events but is not recognized because
- it is not probable than an outflow of resources embodying economic benefits will be required to settle the obligation
- the amount of the obligation cannot be measured with sufficient reliability
Present obligation arises as a result of past events => NO
then neither a provision nor a contingent liability exists