Accounting For Liabilities (8) Flashcards
(13 cards)
What is a liability?
Present obligation, as a result of a past event, from which present economic benefit is expected to flow from the entity.
What is a provision?
A type of liability that has uncertain timing or amount.
What is meant by present obligation? What are the two types?
You are required to do that because there is a legal obligation or constructive obligation.
What is meant by legal obligation?
Arises as a result of a contract or legislation
What is meant by a constructive obligation?
Is an obligation that derived form the actions of an entity where:
There is an established pattern of past practice, published policies or a specific statement that e entity has indicated to other parties that it will accept certain responsibilities.
As a result the entity has created a valid expectation in other parties that it will keep up with those responsibilities.
What is considered probable?
More than 50%
What is considered a reliable estimate?
At each year end the amount of the provision should be considered to ensure it is valid and recorded at the correct amount.
When does a contingent liability arise?
Where an obligation is only possible rather than probable eg less than 50% or cannot be measured reliably.
What is a contingent asset?
An asset arising from past events whose existence will only be confirmed by the occurrence of one or more uncertain future events not wholly within the control of the entity.
Do you adjust for contingent liabilities?
No you just disclose
You can only recognise an asset when…
It is virtually certain.
Do you adjust for contingent assets?
No just disclose
What % of certainty does an asset become contingent?
50% and above
Under 50% is entirely ignored
