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Questions and Answers
A provision can be recognized if the payment is unlikely and the amount cannot be estimated reliably.
A provision can be recognized if the payment is unlikely and the amount cannot be estimated reliably.
False
Current liabilities must be settled within a month or within an operating cycle.
Current liabilities must be settled within a month or within an operating cycle.
False
Contingent liabilities are confirmed obligations that arise from past events.
Contingent liabilities are confirmed obligations that arise from past events.
False
Reassessment of provisions must occur at every balance sheet date according to IAS 37.
Reassessment of provisions must occur at every balance sheet date according to IAS 37.
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Provisions for large populations of events are measured at present value using a post-tax discount rate.
Provisions for large populations of events are measured at present value using a post-tax discount rate.
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Dividends in arrears on cumulative preference shares should be disclosed but are not considered a liability.
Dividends in arrears on cumulative preference shares should be disclosed but are not considered a liability.
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Customer loyalty awards sponsored by third parties are classified as an unearned revenue.
Customer loyalty awards sponsored by third parties are classified as an unearned revenue.
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VAT payable is recorded as a non-current liability on the balance sheet.
VAT payable is recorded as a non-current liability on the balance sheet.
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The warranty liability is typically split between current and non-current liabilities.
The warranty liability is typically split between current and non-current liabilities.
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Discount vouchers, coupons, and other customer loyalty awards are excluded from the transaction price.
Discount vouchers, coupons, and other customer loyalty awards are excluded from the transaction price.
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Unearned revenues must be collected in advance to be recognized as a liability.
Unearned revenues must be collected in advance to be recognized as a liability.
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Gift certificates outstanding are always recognized as current liabilities.
Gift certificates outstanding are always recognized as current liabilities.
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The disclosure requirements for provisions include a reconciliation for each class of provision, including the closing balance.
The disclosure requirements for provisions include a reconciliation for each class of provision, including the closing balance.
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Study Notes
PAS 37: Provisions, Contingent Liabilities, and Contingent Assets
- Defines 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 at 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.
- Measurement uses the best estimate of expenditure needed to settle the obligation at the balance sheet date.
- Considers both 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.
- If outflow is no longer probable, the provision is reversed.
Contingent Liabilities
- Possible obligations whose existence depends on uncertain future events outside the entity's control.
Examples of Provisions
- Environmental clean-up
- Damages
- Warranties
- Bonuses
- VAT payable
- Payroll taxes (SSS, Pag-IBIG, PhilHealth, WTax)
- Discount vouchers, coupons, and customer loyalty awards
- Premiums (as a transaction price component or selling expense)
- Unearned revenues (collection in advance vs. performance obligation satisfaction)
- Gift certificates outstanding
Dividends Payable
- Cash dividends are current liabilities.
- Undeclared dividends are not liabilities.
- Dividends in arrears on cumulative preference shares require disclosure.
- Property and scrip dividends are generally current.
- Share dividends are not liabilities.
Deposits and Advances
- Require entries to track and account for the funds.
Financial Statement Presentation
- Assets and liabilities are classified as current or non-current, excluding liquidity.
- Current liabilities meet at least one criteria: normal operating cycle, traded, due within 12 months, or no unconditional right to defer settlement for at least 12 months.
- Warranties, dividends, and deposits/advances may be split between current and non-current classifications.
Disclosure Requirements
- Reconciliation for each provision class is needed, including opening balance, additions, usage, reversals, discount unwinding/rate changes, and closing balance.
- Prior-year reconciliation is not required.
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Description
This quiz covers key concepts related to PAS 37, including the definitions and accounting for provisions, contingent liabilities, and contingent assets. It also explores the nature of current liabilities and the measurement of uncertain obligations. Test your understanding of these important financial principles.
