CH9 provisions, contingencies and events after the reporting period Flashcards
definition of provision
liability of uncertain timing or amount
***what are the golden rules for creating a provision?
company must prove all three:
1. must be a PRESENT OBLIGATION (legal or constructive) as a result of a past event
2. leads to a PROBABLE outflow of economic benefit (>50%)
3. RELIABLE ESTIMATE can be made of the amount of the obligation
definition of constructive obligation
obligation derived from a valid expectation established from a past pattern of practice (eg M&S returns)
Key points for reliable estimate in terms of the golden rules for creating a provision?
it should be your BEST ESTIMATE accounting for the time value of money (ie you MUST discount it back to PV if the effect of the discounting is material)
what should happen at period end with respect to provisions?
the provision should be reviewed to ensure that they still represent the best estimate (discounted back to PV) of what we expect to pay.
What MUST we do if at any point we feel that any of the three golden rules are no longer being met?
release the provision
DR exp
CR provis
Where do we disclose movements in provisions?
In a note
can you provide for future operating losses?
NO
what is an onerous contract?
one that we have signed up to but the UNAVOIDABLE costs of meeting it exceed the economic benefit expected to be received from it
Should you provide for losses from onerous contracts?
Yes, you MUST provide for net losses
onerous contracts: what are the unavoidable costs?
the LOWER of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it.
Does restructuring meet the 3 golden rules for creating a provision?
It can do.
Rule 1:
Arises from past event: yes - the decision to restructure.
Legal obligation: not likely to be a legal obligation but my be a constructive one (no realistic alternative but to do it). To prove that you have a constructive obligation, you need to prove that you have detailed plans approved by management before y/e AND have raised a valid expectation in those affected by starting implementation or announcing its main features.
When creating a provision for restructuring, what costs can be included?
ONLY include any costs DIRECTLY attributable to that restructuring - no allocating overheads. eg redundancy costs
NOT any costs associated with ongoing activities eg retraining staff, relocating staff, buying new systems
If part of the restructuring involves the sale of an operation, when does the obligation to go through with it arise?
When the entity is committed to the sale ie. when the sale contract is signed.
How do you treat decommissioning costs in terms of creating a provision - part 1? What is the initial double entry?
You record the cost at PV and it MUST be capitalised and depreciated over the asset’s UL.
How do you treat decommissioning costs in terms of creating a provision - part 2? What are the subsequent double entries?
DR to PPE (will be depreciated along with the cost of the asset)
CR to Provision needs to be unwound (ie. we need to grow it from its pv to the cost it will be in n years time). Do this by increasing the provision and charging fin costs
How do you start an ‘explain question’?
‘under the x standard an entity (describe eg the recognition criteria)’
Then apply this to scenario.
‘the x provision requires…’ apply to scenario
Conclude
what is a contingent liability and what is the double entry?
- A POSSIBLE obligation arising from past events and whose existence is will be confirmed only by the occurrence/non-occurrence of one or more uncertain future events not wholly within the entity’s control
- A present obligation arising from past events but is not recognised because:
- it is not PROBABLE that an outflow of economic resources will be required or
- the amount cannot be measured reliably
NO double entry!! Only a disclosure.
What should be in the contingent liability disclosure note?
- description of its nature
- estimate of financial effect (measured in the same way as provision)
- indication of any uncertainties
- possibility of any reimbursements
If the contingent liability is considered ‘remote’ or highly unlikely, how should you disclose?
you don’t have to disclose at all
Summary of requirements regarding probable, possible and remote chances of being sued
what is a contingent asset?
We are suing someone else and expecting the to pay us
When do we recognise a contingent asset?
When are post y/e events adjusted for?
