Week 5: Liabilities Flashcards
What is a Legal Obligation
Another person/entity has a legal claim on payment
Provision Definition
A provision is a liability that is of uncertain timing amount
List three items recognised as suitable subject matter for provisions (3)
- Product warranties
- Environmental liabilities
- Reorganisation Costs
What can be included in provision for reorganisation? (3)
- Redundancies
- Costs of terminating leases
- Expenditure made in the course of reorganisation
What are liabilities? (4)
- Present obligation of the enterprise
- Arise from past events
- Results in the outflow of resources
- Embody economic benefit
What is a Constructive Obligation
An entity creates a valid expectation on the part of other parties that will discharge certain responsibilities
(Habitual refunds, Contamination clean ups)
Types of Liabilities (3)
1) Specific amounts of liabilities owed by an entity to specific creditors
2) Obligation known exist but amount has yet to be determined
3) Obligation might exist if some future event happens
What is the impact of making a provision on the financial statements (3)
1) Charging an amount against current profits in respect of costs expected to be incurred in the future which relates to current accounting period
2) Ownership interest is reduced by an expense in P&L and a liability created under the name of a provision.
3) No long term effect on profits but short term expense shifting
What are the principles under UK and International Accounting Standards for recognising a provision (3)
- Entity has a present obligation as a result of a past event
- It is probable that a transfer of economic benefit will be required to settle the obligation
- A reliable estimate can be made of the amount of obligation
What are Contingent Liabilities
A potential liability that may occur depending on the outcome of an uncertain future event
List three potential problems when accounting provisions and contingent liabilities (3)
1) Terms used are not defined (remote, possible, probable)
2) No guidance on how to make reliable estimates
3) Potential litigation and the risk of disclosing prejudicial information
What is NOT included in provision for reorganisation (3)
- Retraining/Relocating staff
- Marketing/Investment
- Distribution Network
What is restructuring?(4)
- Closing down divisions
- Sale or termination of a line of business
- Changes in Management structure
- Fundamental Reorganisations
Recognition of a provision (3)
1) Present obligation has arisen as a result of past events
2) Payment is probable
3) The amount can be estimated reliably
