Flashcards
Chapter 5 Provisions, contingent liabilities
Cards in this deck (25)
- 1Which cases are not covered by IAS37 (contingent liabilities, provisions and contingent assets)a) resulting from financial instruments and in insurance entities from contracts with policy holders
b) resulting from executory contracts
c) those covered by another IFRS
for ex - income taxes IAS12
leases IAS17
employee benefits IAS19
insurance contracts - 2What is a provision?a provision is a subset of liabilities which is of uncertain timing or amount
- 3What does contingent liability mean under IAS37?A contingent liability means one of the following:
(a) An obligation that is estimated to have less than a 50% likelihood of existing.
(b) A present obligation that has less than a 50% likelihood of requiring an outflow of economic benefits.
(c) A present obligation for which a sufficiently reliable estimate cannot be made disclosed. - 4What is an obligating event?An obligating event is an event that creates a legal or constructive
obligation that results in an entity having no realistic alternative to
settling that obligation. - 5What is legal obligation?A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law - 6What is a constructive obligation?A constructive obligation is an obligation that derives from an entity’s
actions where:
(a) by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to
other parties that it will accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of
those other parties that it will discharge those responsibilities. - 7When will provision is recognized?(a) an entity has a present obligation (legal or constructive) as a result
of a past event;
(b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. - 8What is considered a present obligation?a past event is deemed to give rise to a present obligation if, taking
account of all available evidence, it is more likely than not that a present
obligation exists at the end of the reporting period. - 9How provisions should be measured?The amount recognised as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the end of the
reporting period. - 10What are methods of best estimate?Where the provision
being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name
for this statistical method of estimation is ‘expected value’.
When there is single obligation, hen the method is best estimate of the liability - 11How gains on expected disposals are treated?Gains from the expected disposal of assets shall not be taken into account
in measuring a provision. - 12What is the requirement of IAS 37 about changes in provision?Provisions shall be reviewed at the end of each reporting period and
adjusted to reflect the current best estimate. If it is no longer probable
that an outflow of resources embodying economic benefits will be
required to settle the obligation, the provision shall be reversed. - 13What is an onerous contract and should provision be recognized under these contracts?This Standard defines an onerous contract as a contract in which the
unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. the present obligation under the contract shall be recognised and measured as a provision. - 14What states IAS 37 regarding future operating losses?Provisions shall not be recognised for future operating losses.
- 15What does IAS 37 say about repair and maintenance of assets?It generally says if an entity can have an option to avoid these repairs (such as be selling the asset), then entity does not recognise provision.
- 16What is restructuring?A restructuring is a programme that is planned and controlled by
management, and materially changes either:
(a) the scope of a business undertaken by an entity; or
(b) the manner in which that business is conducted. - 17Provide two examples of restructuring.(a) sale or termination of a line of business;
(b) the closure of business locations in a country or region or the relocation
of business activities from one country or region to another; - 18Provide another 2 examples of restructuring(c) changes in management structure, for example, eliminating a layer of
management; and
(d) fundamental reorganisations that have a material effect on the nature
and focus of the entity’s operations. - 19When does restructuring obligation arise?a) an entity has a detailed formal plan for the restructuring
b) has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. - 20What is IAS 37 requirement regarding sales of operation?No obligation arises for the sale of an operation until the entity is
committed to the sale, ie there is a binding sale agreement, i.e there is a real purchaser and contract - 21Which restructuring costs may be recognized as provision?A restructuring provision should include only the direct expenditures arising from
the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the entity. - 22Provide examples of costs that cannot be recognised as provision?(a) retraining or relocating continuing staff;
(b) marketing; or
(c) investment in new systems and distribution networks - 23What does IAS37 sya about decommissioning costs?When an entity is required to remove an asset at the end of its useful life and to restore the site where it was located, these costs are required to be provided for
- 24How decommissioning costs is recognised in SFP and PL?The total decommissioning cost is estimated, discounted to its present value and it
is this amount which forms the initial provision. This ‘initial estimate of the costs of
dismantling and removing the item and restoring the site’ is added to the
corresponding asset’s cost. [IAS 16.16]. Thereafter, the asset is depreciated over its useful life, while the discounted provision is progressively unwound, with the
unwinding charge shown as a finance cost, - 25—levies should be added.
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- Financial accounting: IFRS application Flashcards on Chapter 5 Provisions, contingent liabilities, created by Archimed Nemes on 10/01/2018.
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