Accounting for Provisions and Contingencies (2)

Question 1

What is a contingent liability (events occurrence future events)

Answer 1

A possible obligation arising from past events and whose existence is confirmed by occurrence or non-occurrence of one or more uncertain future events not wholly within control of the entity

Question 2

What is a contingent liability (present obligation)

Answer 2

A present obligation that arises from past events but is not recognised

Question 3

Why is present obligation not recognised (outflow resources benefits)

Answer 3

It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation

Question 4

Why is present obligation not recognised (obligation reliability)

Answer 4

The amount of obligation cannot be measured with sufficient reliability

Question 5

What a contingent asset?

Answer 5

A possible asset that arises from past events and whose existence is confirmed only by occurrence/non-occurrence of one or more uncertain future events not wholly within control of entity

Question 6

What are provisions and contingencies an example of?

Answer 6

Accounting estimates

Question 7

Why are accounting estimates difficult to audit?

Answer 7

Due to the degree of judgment required and risk of manipulation

Question 8

What does ISA 501 cover?

Answer 8

Contingencies relating to litigation and legal claims

Question 9

What do litigation and claims involve?

Answer 9

The entity may have a material effect on FSs, and will require adjustment to or disclosure in those FSs