Chapter 5 - provisions , contingent liabilities and contingent assets

Question 1

Define provision

Answer 1

A liability of uncertain timing or amount

Question 2

When do we recognise a provision?

Answer 2

1) reliable measure
2) probable outflow of economic benefits
3) present obligation from a past event

Question 3

What are the two possible types of obligation according to IAS37?

Answer 3

A) Legal obligation - an obligation that derives from a contract, legislation or other operation of law

B) Constructive obligation - an obligation that derives from an entity’s action whereby an established pattern of past practice and published policies.

The entity has indicated to other parties that it will accept specific responsibilities, and as a result, the entity has created a valid expectation that it will discharge those responsibilities.

Question 4

Onerous Contracts

Answer 4

A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

• Provisions are created for unavoidable costs:

1) Net cost of fulfilling the contract
2) penalties from failure to fulfil the contract

Question 5

Contingent Liability

Answer 5

• Possible obligation arising from past events

OR

• Present obligation arising from past events with uncertain amount of obligation and probable outflow of economic benefit

the amount of the obligation cannot be measured with sufficient reliability

Question 6

Contingent asset

Answer 6

A possible 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