Provisions and Contingent liabilities

Question 1

Provision

Answer 1

liability of uncertain timing or amount

Question 2

liability

Answer 2

present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

Question 2

obligation event

Answer 2

event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation

Question 3

provision shall be recognized when

Answer 3

• entity has a present obligation as a result of a past event
• it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
• a reliable estimate can be made of the amount of the obligation

Question 4

present obligation existence

Answer 4

exist if more likely than not

Question 5

single obligations probability

Answer 5

outflow resources is more likely than not to occur (>50%)

Question 6

group of similar obligations probability

Answer 6

probability is determined by considering the class of obligations as a whole (fulfilled even if ourflow probability for any one item is small)

Question 7

Measurement of provisions

Answer 7

measured at the best estimate of the expenditure required to settle the present obligation. Where the effect of time value of money is material, amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation

Question 8

Single obligation measurement

Answer 8

individual most likely outcome may be best estimate, however also consider other possible outcomes

Question 9

Reimbursements

Answer 9

• shall be treated as a separate asset
• only recognized if ‘virtually certain’

Question 10

changes in provisions

Answer 10

• shall be reviewed at the end of each reporting period and adjusted to reflect current best estimate
• no longer probable outflow of resources embody economic benefits will be required to settle obligation, provision shall be reversed

Question 11

restructuring provisions criteria

Answer 11

• a present obligation must exist
• costs must be directly and necessarily caused by the restructuring and not associated with the ongoing activities of the entity
• if restructuring involves the sale of an operation, a binding sale agreement is needed before a provision can be recognized

Question 12

contingent liability (meaning 1)

Answer 12

a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity

Question 13

Contingent liability (meaning 2)

Answer 13

a present obligation that arises from past events but is not recognized because
- it is not probable than an outflow of resources embodying economic benefits will be required to settle the obligation
- the amount of the obligation cannot be measured with sufficient reliability

Question 14

Present obligation arises as a result of past events => NO

Answer 14

then neither a provision nor a contingent liability exists

Question 15

Present obligation arises as a result of past events => UNCLEAR

Answer 15

then contingent liability if the possibility of outflow is higher than remote