PROVISIONS, CONTINGENT LIABILITIES AND CONTIGENT ASSETS (IAS 37) Flashcards
What is a provision?
A provision is a liability of uncertain timing or amount
What is a contigent liability?
- A possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the enity
- A present obligation that arises from past events that is not recognised because:
1. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or
2. the amount of the obligation cannot be measured with sufficient reliability.
What is a contingent asset?
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain fure events not wholly whithin the control of the entity
Are provision, contingent liabilities, and contingent assets recognised? If yes, when?
Contingent liabilities and contingent assets are not recognized.
Provisions are recognized when:
- The entity has a present legal or constructive obligation as a result of a past event
- It is probable that an outflow of economic benefits will be required to settle the obligation; and
- A reliable estimate can be made of the obligation
How are provisions measured?
Provisions are measured at the best estimate of the expenditure required to settle the obligation at the reporting date.
How is measured the obligation of provision that involves a large population of items?
Where the provision being measured involves a large population of items, the obligation is estimated by weighing all possible outcomes by their associated probabilities (the ‘expected value’
method of estimation).
When are provisions reviewed?
Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.
What happen if it is no longer probable that an outflow of economic benefits will be required to settle the obligation?
If it is no longer probable that an outflow of economic benefits will be required
to settle the obligation, the provision is released.
What is an onerous contract provision?
Is a provision where the costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
How are recognised provisions from onerous contract?
For onerous contract, the provision is recognised and measured at the lower of:
- the cost of fulfilling the contract
- the costs/penalties incurred in cancelling the contract
What does an entity recognises before a separate provision for an onerous contract is recognised?
an entity recognises any impairment loss that has occurred on assets dedicated to that contract.
When an enity is allowed to recognise restructuring provisions?
It is allowed when an enity:
- has a detailed formal plan for the restructuring;
- intend to carry out the restructuring by starting to implement that plan or announging its main feature before the end of the reporting period
