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Questions and Answers
A provision is a liability with a certain timing and amount.
False
The measurement of provisions requires the use of a post-tax discount rate.
False
Contingent liabilities are confirmed by events that are entirely controlled by the entity.
False
Three essential characteristics of liabilities include present obligation, arising from past events, and resulting in an inflow of resources.
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A provision can be reversed if an outflow is no longer probable.
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Dividends in arrears on cumulative preference shares are considered a liability.
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Customer loyalty awards can be accounted for as incurred expenses immediately when issued.
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Unearned revenues need to be recognized upon satisfaction of the performance obligation.
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Gift certificates outstanding are treated as current liabilities.
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Provisions for warranty must be divided between current and non-current liabilities.
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The reconciliation for each class of provision requires prior year reconciliation.
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Discount vouchers and coupons are classified separately from other forms of customer loyalty awards.
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Deposits and advances are always classified as current liabilities.
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Study Notes
PAS 37: Provisions, Contingent Liabilities, and Contingent Assets
- Outlines accounting for provisions (liabilities with uncertain timing or amount), contingent assets (possible assets), and contingent liabilities (possible obligations or present obligations that are not probable or reliably measurable).
- Provisions are measured using the best estimate.
Current Liabilities
- Short-term financial obligations due within one year or a normal operating cycle.
- Three characteristics: present obligation arising from past events, resulting in an outflow of resources.
Provisions
- A liability of uncertain timing or amount.
- Requires a present obligation from a past event, probable payment, and reliably estimable amount.
- Measured as the best estimate of expenditure needed to settle the obligation at the balance sheet date.
- Considers provisions for one-off events and large populations of events.
- Uses discounted present value with a pre-tax discount rate reflecting time value of money and specific liability risks.
Remeasurement of Provisions
- Reviewed and adjusted at each balance sheet date.
- Reversed if outflow is no longer probable.
Contingent Liabilities
- Possible obligations whose existence depends on uncertain future events outside the entity's control.
Financial Statement Presentation
- Assets and liabilities are categorized as current or non-current.
- Current liabilities are those typically settled within the normal operating cycle, traded, due within 12 months, or without the unconditional right to defer settlement for at least 12 months.
- Warranty provisions, dividends, and deposits/advances may be split between current and non-current classifications.
Disclosure Requirements
- Reconciliation for each class of provision is necessary, including opening and closing balances, additions, usage, reversals, unwinding of discounts, and changes in discount rates.
- A prior-year reconciliation is not required.
Examples of Provisions
- Environmental clean-up
- Damages
- Warranty
- Bonuses
- VAT payable
- Payroll taxes (SSS, Pag-IBIG, PhilHealth, WTax)
- Discount vouchers, coupons, and customer loyalty awards
- Premiums (as component of transaction price or selling expense)
- Unearned revenues (collection in advance vs. performance obligation satisfaction)
- Gift certificates outstanding
- Dividends payable (cash, undeclared, arrears, property/scrip, share)
- Deposits and advances
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Description
This quiz covers key concepts regarding provisions, contingent liabilities, and current liabilities as per PAS 37. It explores the definitions, characteristics, and measurement principles involved in accounting for uncertain liabilities and short-term financial obligations. Test your understanding of these essential accounting topics.
