Provisions and Contingencies

Question 1

What is a contingent obligation?

Answer 1

Where there is a valid expectation due to custom or past practice. A provision should be made where constructive obligations arise

Question 2

Is there a present obligation where an aircraft needs periodic overhauls?

Answer 2

No - the company do not have to pay the overhaul fees. They could decide to scrap the aircraft

Question 2

What is a contingent obligation?

Answer 2

Where there is a valid expectation due to custom or past practice. A provision should be made where constructive obligations arise

Question 3

Is there a present obligation where an aircraft needs periodic overhauls?

Answer 3

No - the company do not have to pay the overhaul fees. They could decide to scrap the aircraft so no provision should be made, even if the company do pay for the overhauls

Question 4

Is there a present obligation where an aircraft needs periodic overhauls?

Answer 4

No - the company do not have to pay the overhaul fees. They could decide to scrap the aircraft so no provision should be made, even if the company do pay for the overhauls

Question 4

If there s a large population if items within an obligation (e.g. warranty), how do you reliably estimate the amount of the obligation?

Answer 4

By weighting all outcomes and their probabilities

Question 5

Is there a present obligation where an aircraft needs periodic overhauls?

Answer 5

No - the company do not have to pay the overhaul fees. They could decide to scrap the aircraft so no provision should be made, even if the company do pay for the overhauls

Question 6

If there is a large population if items within an obligation (e.g. warranty), how do you reliably estimate the amount of the obligation?

Answer 6

By weighting all outcomes and their probabilities

Question 7

Should future operating losses be recognised by a loss?

Answer 7

No, this is specifically disallowed by IAS 39 as there is no obligtion to continue to operate and incur the loss

Question 7

If there is a large population if items within an obligation (e.g. warranty), how do you reliably estimate the amount of the obligation?

Answer 7

By weighting all outcomes and their probabilities

Question 7

Is there a present obligation where an aircraft needs periodic overhauls?

Answer 7

No - the company do not have to pay the overhaul fees. They could decide to scrap the aircraft so no provision should be made, even if the company do pay for the overhauls

Question 8

Should future operating losses be recognised by a loss?

Answer 8

No, this is specifically disallowed by IAS 39 as there is no obligtion to continue to operate and incur the loss

Question 8

At what point can a restrucuturing provision be made?

What costs can be inlcuded?

Answer 8

When there is a detailed formal plan & there are valid expectations to complete the plan

Only direct expenditure necessary to the restructuring can be included
Specifically, retaining or relocatin staff costs are not allowed

Question 9

Should future operating losses be recognised by a loss?

Answer 9

No, this is specifically disallowed by IAS 39 as there is no obligtion to continue to operate and incur the loss

Question 9

At what point can a restrucuturing provision be made?

What costs can be inlcuded?

Answer 9

When there is a detailed formal plan & there are valid expectations to complete the plan

Only direct expenditure necessary to the restructuring can be included
Specifically, retaining or relocatin staff costs are not allowed

Question 9

What is a contingent liability? How should it be recorded?

What is a contingent liability? How should it be recorded?

Answer 9

A possible obligation that is not recognised in the accounts as it does not fulfil the probable requirements. Instead, it should be disclosed in the accounts

A possible asset that is not recognised in the accounts as it does not fulfil the probable requirements. It should not be recognised in the accounts and should only be disclosed if it is probable