Accounting for liabilities and the SPL Flashcards
(24 cards)
What is the definition of a liability?
A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility which the entity has no pratical ability to avoid.
If a company has over estimated its corporation tax by £5,000, what will the adjustment be?
20-1 Estimated corporation tax charge £30,000
20-1 Actual corporation tax charge £25,000
20-2 Estimated corporation tax charge £20,000
SPL - £15,000 - Estimated value for 20-2 (20,000) minus the over estimated amount (5,000)
SFP - Tax liability - £20,000
What will the tax liability double entry look for the below:
20-1 Estimated corporation tax charge £30,000
20-1 Actual corporation tax charge £25,000
20-2 Estimated corporation tax charge £20,000
Balance b/d 30,000 - Cr
£15 000 - Cr
Bank £25,000 - Dr
Next year - bal b/d will be £20,000
What will the tax liability double entry look for the below:
20-1 Estimated corporation tax charge £40,000
20-1 Actual corporation tax charge £45,000
20-2 Estimated corporation tax charge £30,000
Dr - Bank - £45,000
Cr - Bal b/d - £40,000
Cr - SPL - £35,000 ( Estimated next year + Under estimated amount)
Next year:
Cr - bal b/d £30,000
Whats the double entry for an under provision?
Dr - Tax expense
Cr - Tax liability
What is IAS 37?
Ensure appropriate recognition and measurements are applied to provisions, contingent liabilities and contingent assets. Sufficient information is also disclosed in the notes.
What is a provision?
Liability of an uncertain timing or amount, for example, a warranty given by a seller.
What are the two main components of a liability?
Present obligation as a result of PAST events
Settlement is expected to result in an outflow of economic benefits (payment).
What is a legal obligation and constructive obligation?
Legal obligation - derives from a contract, legislation or other operation of law.
Constructive obligation - Derives from an entity’s actions such as pattern of past practise or valid expectation.
When is a provision recognised?
Probable that an outflow of economic benefits will be required.
A reliable estimate can be made of the amount
An entity has a present obligation as a result of past events
What is a contingent liability?
Either
A possible obligation arising from past events whose existence is uncertain due to future events.
Or
A present obligation which isnt recognised as its not probable to happen or cant be measured reliabily.
What is the treatment for a contingent liability?
Disclosed as a note
What is a contingent asset?
Possible asset arising from past events whose existence will only be confirmed by future events.
How should a contingent asset be treated?
Should not recognise a contingent asset until the realisation of the income is virtually certain then it can be disclosed.
What is IAS 10?
Recognises the events which may occur or information becomes available after the year end that need to be reflected in the financial statements.
What is an adjusting event?
Where evidence is provided of conditions that existed at the end of the period.
Name some adjusting events?
Settlement of a court case confirming a present obligation
Impairment of assets
NRV falls below cost price for inventories
Trade receivables - Where a customer has become insolvent
Discovery of fraud
Determination of amount of sharing or bonus payments
Name some non - adjusting events?
Major purchase of assets
Loss of production capacity - fire/flood
Major share transactions
Discontinuing a part of the business
What is IFRS 15?
Sets out the principle that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expected to be charged.
What is the definition of a customer?
A party that has contracted to obtain goods or services that are the output of an entity’s ordinary activities in exchange for consideration.
What is the definition of Income?
Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
What is the definition of revenue?
Income arising in the course of an entity’s ordinary activities.
What is the 5 step process to recognise revenue in line with IFRS 15?
1 - Identify the contact with the customer
2 - identify the performance obligations in the contract
3 - determine transaction price
4 - allocate transaction price to the performance obligations in the contract
5 - recognise revenue when a performance obligation is satisfied (delivery or perform service)
How to work out the balance of corporation tax charge and tax liability?
Current year estimated + Under estimated previous or - Over estimate previous
Tax liability will always be current year estimated
