Accounting for Provisions and Contingencies (1)

Question 1

What is provision?

Answer 1

A liability of uncertain timing or amount

Question 2

What is a liability?

Answer 2

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from entity of resources embodying economic benefits

Question 3

What is an obligating event?

Answer 3

An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation

Question 4

What does a legal obligation derive from (contract)

Answer 4

A contract (through its explicit or implicit terms)

Question 5

What does a legal obligation derive from (legislation)

Answer 5

Legislation or other operation of law

Question 6

What is a constructive obligation?

Answer 6

An obligation that derives from an entity’s action

Question 7

Constructive obligation (practice policies statement)

Answer 7

By an established pattern of past practice, published policies or a sufficiently specific current statement, entity has indicated to other parties that it will accept certain responsibilities

Question 8

Constructive obligation (entity expectation discharge)

Answer 8

As a result, entity has created a valid expectation on part of those parties that it will discharge those responsibilities