Chapter 6 - Provisions, Contingent Liabilities & Assets Flashcards
(20 cards)
What standard covers provisions and contingent assets/liabilities?
IAS 37
What is not included in the scope of IAS 37?
- Financial instruments under IFRS 9
- Those resulting from an executory contract (contracts under which neither part has performed any of its obligations or both performed to equal extent)
- Those specifically covered by another standard (e.g. IAS 19 employee benefits).
When does IAS 37 say a provision should be recognised?
- The entity has a present legal or constructive obligation of a past event
- It is probable that an outflow of economic benefits will be required to settle the obligation
- A reliable estimate can be recognised of the amount of the obligation
What 2 keywords are critical in the definition of provisions?
- Legal
- constructive
Regarding obligations. “More likely than not” that an obligation will arise.
If a reliable estimate for a provision cannot be made, how should this be treated?
As a contingent liability
When making a estimate on the provision relating to an onerouse contract, what should be taken into account?
Any likely income that will be received under the contract (net off against the full costs)
What conditions should exist for recognising restructuring costs under IAS 37 ?
- A detailed formal plan has been made (including likely cost)
- Announcement has been made to those who were affected
If a provision for restructuring is recognised under IAS 37, what costs should be include?
Only include direct expenditure arising from the restructuring.
Costs which relate to future activities (e.g. relocating or retraining staff) should not be provided for.
Should contingent assets be recognised in the financial statements?
No.
For example, a future inflow relating to a legal claim being pursued where the outcome is uncertain cannot be recognised.
How should an entity handle a contingent liability?
Do not a record a contingent liability in the financial statements.
If it is not probable, not remote, disclose:
- the description / nature
- estimate of financial effect
- indicate that uncertainties exist
- the possibility of reimbursement
What is meant by “expected value” under IAS 37?
Obligation for any provision is estimated by weighing all possible outcomes by their associated probabilities.
If the expenditure required to settle an obligation is likely to incur within a short period after the end of the reporting period, is discounting to present value required?
No
If the outflow of resources is expected to take significant time after the obligation itself arose in a provision, should this be discounted back to present value?
Yes.
The discount rate used should be a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
The unwinding of the discount each period should be included as a finance cost.
Under IAS 37, if an entity is likely to be reimbursed for all or part of the obligation, how should this be treated?
Requires that the reimbursement should be recognised only when it is virtually certain that the amount will be received.
If it is probable only that it will be received, disclosure only as a contingent liability is required.
The recognition of any reimbursement asset is restricted to the amount of the related provision.
True or false:
A provision should only be utilised against the expenditure it was originally set up for.
True
If at the end of the reporting period it is assessed that a transfer of economic benefits is no longer probable, what happens under IAS 37?
The provision is reversed
What happens when there are decommissioning / restoration / environmental costs to do with an asset?
- Future decomissioning costs for PPE are capitalised in accordance with IAS 16 where an obligation to incur them exists from the date of recognition
- They are then depreciated (and charged to P&L) over assets useful life
- Amount capitalised is discounted to the present value
- Unwinding of the discount on the provision is charged to profit & loss
What disclosures are required for provisions, contingent liabilities and contingent assets?
- For a provision, full reconciliation should be presented with the movements during the period
- Explanation for each class of provision of expected timing of outflows, indication of uncertainties over timing
- For a contingent liability, a brief description should be provided for each class of contingent liability. Should include an estimate of the financial effect, uncertainties involved and likelihood of any reimbursements
For a contingent asset, should explain nature of the asset and where practicable the financial effect of such an asset
If the disclosure of information surrounding a provision, contingent liability or contingent asset would be seriously prejudicial to an entity, how should this be treated under IAS 37?
Should be disclosed as to the general nature of the item, and why no additional disclosure has been made.
Rare, but may be possible where there are legal proceedings in progress, outcome of which could be affected by the disclosure of the estimated settlement.
Each year, how should a provision be adjusted under IAS 37?
To the best estimate at the end of the reporting period
