IAS 37 - Provisions (+ Liabilities + Contingent)

Question 1

what is a liability?

Answer 1

present obligation resulting from a past event for an entity to transfer an economic resource

Question 2

when do we recognize a liability?

Answer 2

when it meets the definition and recognition criteria (measurable and probable)

Question 3

what is a provision?

Answer 3

a liability of uncertain timing and amount

Question 4

what is a contingent A/L?

Answer 4

meets the definition but not recognized, as its existence will only be confirmed by a future event that is not within the entity’s control

Question 5

what do we disclose for contingent A/L?

Answer 5

• nature
• financial impact
• uncertain factors

Question 6

when do we recognize a provision?

Answer 6

if:

• present obligation exists
• probable outflow of EBs
• reliable estimate can be made

Question 7

how do we deal with reimbursements for provisions?

Answer 7

we recognize them when virtually certain they will be received when the entity settles its obligation. we recognize it as a separate asset and offset with provision expenses ONLY.

Question 8

what do we do annually for provisions?

Answer 8

review and adjust to reflect current best estimate

Question 9

what is a commitment?

Answer 9

when the future company commits to buy an asset at a future date – they will have an obl in future

Question 10

how do we account for commitments?

Answer 10

disclose only

Question 11

what is the difference between a contingent A/L and a commitment?

Answer 11

contingent = obligation actually exists due to past event
commitment = obligation does not yet exist

Question 12

how do we account for provisions for sales returns?

Answer 12

DR Revenue, CR Provision

DR Right to return, CR Cost of sales

Question 13

how do we account for provisions for warranties?

Answer 13

DR Inventory repairs or COS

CR Provision for warranty

Question 14

what gets rid of provision for warranty?

Answer 14

DR Provision

CR Bank

Question 15

what is an onerous contract?

Answer 15

a contract where the unavoidable costs exceed the benefits to be received. the entity will have to fulfil the contract and can incur a penalty if they do not.

Question 16

what do we measure onerous contracts at?

Answer 16

the least net cost; the lesser of:

• costs to fulfil the contract
• compensation / penalties arising from failing to fulfil the contract

Question 17

how do we recognize an onerous contract?

Answer 17

as a provision; also should consider impairment of assets relating to the contract

Question 18

at what amount do we recognize reimbursements?

Answer 18

at amount received, but cannot exceed the amount of the provision

Question 19

what are some examples of restructing?

Answer 19

• sale/termination of a business line
• closure of locations
• changes in mgmt structure

Question 20

when do we recognize a restructuring provision?

Answer 20

if:

• present obligation exists
• probable outflow of EBs
• reliable estimate can be made

Question 21

when does a present obligation exist to restructure?

Answer 21

if, at reporting date:

• entity has detailed formal restructuring plan
• has raised a valid expectation to those affected (either through implementing plan or announcing)

Question 22

what are some qualifying restructuring costs?

Answer 22

necessary costs caused by restructuring:

• costs of making employees redundant
• retrenchment packages
• lease termination costs

Question 23

what is not included in qualifying restructuring costs?

Answer 23

• costs associated with ongoing activities
• retraining / relocating continuing staff
• marketing
• investment in new systems
• any gain from the expected disposal of assets

Question 24

what can restructuring trigger?

Answer 24

• asset impairment
• distribution of assets to SH
• assets being classified as held for sale

Question 25

what do we do with future operating losses?

Answer 25

• no disclosure, nothing
• they may indicate impairment of an asset though
• no past event

Question 26

which changes in decommissioning liability will impact PPE amount directly?

Answer 26

• outflow to settle obligation
• changes discount rate used
• changes period of discounting

Question 27

which changes in decommissioning liability will impact P/L?

Answer 27

unwinding of the discount

Question 28

what could restructuring indicate?

Answer 28

impairment

Question 29

what is the process for non-cash distributions to owners?

Answer 29

1) declare the dividend as normal at the FV of the assets distributed
2) remeasure the payable at reporting date if relevant (for a FV adjustment, same JE as before usually)
3) settle the payable with the non-cash asset and any diff = P/L