IAS 37

Question 1

What are the present obligations as a result of a past event?

Answer 1

Constructive
Legal

Question 2

When to make a provision?

Answer 2

Present obligation as result of past event

Probable transfer/outflow of economic benefit >50%

Measure the outcome reliably

Question 3

What does probable mean?

Answer 3

Greater than 50% chance of outflow occurring

Question 4

Initial measurement of provision?

Answer 4

Best estimate of expenditure

Expected values

Discount to PV if materially different

Question 5

When should provision be reviewed?

Answer 5

Annually

Question 6

When should provision only be used for?

Answer 6

Expense originally created

Question 7

Dismantling cost? Double entry

Answer 7

Debit: PPE
Credit: Provision

Question 8

Unwinding of interest?

Answer 8

Debit: Finance cost (SPL)
Credit: Provision (SFP)

Growing the provision to its final value

Question 9

What is a contingent liability?

Answer 9

Possible obligation

Present obligation that can’t be measured or no probable outflow of resources

Question 10

If I have a contingent liabiltiy?

Answer 10

Disclose the liability

Question 11

What is a warranty?

Answer 11

A legal obligation

Question 12

What makes a provision probable?

Answer 12

It has happened in the past

Question 13

What if something is possible?

Answer 13

A contingent liability

Question 14

Possible?

Answer 14

Less than 50% of losing the case

Question 15

What should be disclosed in contingent liability?

Answer 15

Amount
Nature

Question 16

When to measure as a provision?

Answer 16

Probable chance
Can be measured reliably

Question 17

How to measure provision for single obligation?

Answer 17

Look for most likely outcome if it is probable

Question 18

How to measure provision for large population?

Answer 18

Based on expected values of possible outcomes

Question 19

How is future provision treated in FSs?

Answer 19

Discounted to date of provision in FS
Debit: Expense (SPL)
Credit: Provision

Unwind the discount:
Discounted PV * cost of capital * pro-rata
Debit: FInance cost
Credit: Provision

Discounted to earlier date in FS + Unwind the discount = Total provision

Question 20

What is unwinding the discount?

Answer 20

Adjusting the present value of future cash flows to reflect their current value

Question 21

What is done with future operating losses?

Answer 21

No provision can be made for anticipated losses as there is no obligation

No obligation = No provision

Question 22

What is an onerous contract?

Answer 22

Cost of fulfilling contracts exceeds benefits from the contract

Question 23

How is a provision recognised for an onerous contract? (PV)

Answer 23

Lower of:

PV of continuing under contract

PV of exiting the contract

Question 24

Examples of restructuring?

Answer 24

Sale or closure of a line of business
Ceasing activities in a geographical location
Relocating activities
Re-organisation

Question 25

When is a provision recognised in restructuring?

Answer 25

If a detailed formal plan and the plan has been announced

Question 26

What does the restructuring provision only include?

Answer 26

Costs that are necessarily incurred and not associated with continuing activities

Question 27

What is a contingent asset/

Answer 27

Uncertainty about receipt of asset in the future

Question 28

What is done when an asset is virtually certain?

Answer 28

Recognise an asset

Question 29

What is done when an asset is probable?

Answer 29

Disclose

Question 30

What is done when an asset is remote/possible?

Answer 30

Ignore

Question 31

Are unrecoverable legal costs a provison?

Answer 31

Yes, as they will happen

Question 32

When are costs capitalised?

Answer 32

Acquire, produce or improve an asset

Question 33

Estimation for a single obligation point of action?

Answer 33

Most likely settlement provided in FSs. Others discarded

Question 34

Calculating a provision for FSs?

Answer 34

Discount to PV, then unwind discount Amount in SFP: Discounted amount + discount

Question 35

Example of contingent asset?

Answer 35

Inventory that was stolen

Question 36

Difference between contingent asset and liability

Answer 36

Potential future assets vs. potential future obligations

Question 37

What is a constructive obligation?

Answer 37

An obligation that arises from an entity's past actions

Question 38

What is a legal obligation?

Answer 38

An obligation that arises from a contract