Provisions and Contingencies

Question 1

Definition and examples

Answer 1

Provision is a liability of uncertain timing or amount. Provisions are more uncertain that other liabilities in terms of when they will be settled, or the amount required to settle them

Examples:
1. Estimated Liabs on pending lawsuit
2. Provisions for restructuring costs
3. Provisions for environmental damages
4. Provisions of decommissioning costs of an item of PPE

Entry:
Dr. Expense/Loss
Cr. Liabs

Question 2

Important: A provision shall recognize if the following conditions are met (all);

Answer 2

1. The entity has a present obligation, legal or constructive, as a result of past event
2. It is PROBABLE that an outflow of resources embodying economic benefits would be required to settle the obligation
3. The amount of the obligation can be estimated reliably

Question 3

Probable means?

Answer 3

More likely than not or there is higher likelihood that the event will happen

Rules:
51% or more - Probable
50% or Less - Possible
10% or Less - Remote

Question 4

Provision Measurement

Answer 4

1. General Rule (one time event) - Best Estimate
2. Involves a large population of items - Expected Value
3. Each possible outcome in a RANGE is equally likely - Midpoint/Average

Question 5

Contingent Liabilities definition

Answer 5

1. POSSIBLE obligation that arise from past events
2. Present obligation arising from past event but is not recognized because it is not probable

EITHER Probable or Measurable but NOT BOTH

-Not recognized in the FS but SHALL only disclosed. If remote, no disclosure is necessary

Question 6

Contingent Asset

Answer 6

If Probable - Shall Disclosed only!
If Possible or remote - not required to disclose!