Module 3 - Part C

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Questions and Answers

Under what condition is disclosure NOT required for a future sacrifice related to a present obligation?

When the future sacrifice is deemed remote. (correct)
When the obligation arises from a non-binding contract.
When the future sacrifice is considered probable but not certain.
When the amount of the obligation cannot be reliably estimated.

What is the critical factor that distinguishes a provision from a contingent liability?

The legal enforceability of the obligation.
The reliability with which the amount of the obligation can be estimated. (correct)
The certainty that a past event has occurred.
The probability of a future outflow of economic benefits.

Under IAS 37, when should a contingent asset be disclosed?

When the inflow of economic benefits is virtually certain.
When the inflow of economic benefits is possible but not probable.
When the inflow of economic benefits is probable but not virtually certain. (correct)
When the outflow of economic benefits is remote.

An entity is involved in legal proceedings and initially believes it will not be found liable, but the case develops unfavorably. If the amount of damages cannot be reliably estimated, what is required?

The entity discloses a contingent liability because a future sacrifice is probable. (D) Signup and view all the answers

Which of the following best describes a contingent liability under IAS 37?

A possible obligation arising from past events, whose existence will be confirmed by uncertain future events. (D) Signup and view all the answers

What should an entity do in cases where it is unclear whether a past event has given rise to a present obligation?

Consider all available evidence, including expert opinions and events after the reporting period. (C) Signup and view all the answers

According to IAS 37, what is the required accounting treatment for a possible obligation where the likelihood of an outflow of resources is remote?

No provision is recognized, and no disclosure is required. (A) Signup and view all the answers

What is the crucial factor for a past event to be considered as giving rise to an obligation?

The entity must have no practical ability to avoid the obligation. (D) Signup and view all the answers

IAS 37 requires disclosure of contingent liabilities unless which condition is met?

The possibility of an outflow of resources is remote. (B) Signup and view all the answers

How does professional judgment play a role in determining whether an item is a contingent asset?

It is used to assess whether the inflow of economic benefits is probable, requiring disclosure. (D) Signup and view all the answers

Under what circumstance is a provision recognized, according to IAS 37?

When there is a present obligation that probably requires an outflow of resources. (D) Signup and view all the answers

When should an accountant recognize a liability rather than disclose a contingent liability?

When an outflow of resources is probable and the amount of the obligations is reliably measurable. (B) Signup and view all the answers

When is it appropriate to recognize an asset related to a probable inflow of economic benefits?

When the realization of income is virtually certain, as the asset is not a contingent asset. (C) Signup and view all the answers

Why is exercising professional judgment essential when deciding on the nature of an obligation?

To decide whether the obligation is recognized, disclosed, or not reported. (B) Signup and view all the answers

What is an example of a situation where professional judgement is used regarding disclosure of a contingency?

Deciding the extent to which potentially sensitive information is made public in a situation where the outcome is uncertain. (D) Signup and view all the answers

What is required regarding estimates of contingent assets?

Disclosed, using principles set out for the measurement of provisions. (C) Signup and view all the answers

Which scenario would most likely require the recognition of a provision, rather than the disclosure of a contingent liability?

A present obligation with a probable future sacrifice of economic benefits, where a reliable estimate of the amount can be made. (C) Signup and view all the answers

Which situation exemplifies a contingent liability, as defined by IAS 37?

A potential obligation arising from a lawsuit where the outcome is uncertain. (B) Signup and view all the answers

In determining whether a liability or a contingent liability exists, what should an entity do when there is uncertainty if a past event has given rise to a present obligation?

Consider all available evidence, including the opinions of experts and information from events occurring between the reporting period and the completion of the financial statements. (A) Signup and view all the answers

What should an entity disclose regarding contingent assets at the end of the reporting period?

The nature of the contingent assets and an estimate of their financial effect, where practicable. (C) Signup and view all the answers

In which of the following cases would a contingent liability be disclosed?

The outflow of resources is possible, but not probable. (A) Signup and view all the answers

According to the Conceptual Framework, what condition must be met for a past event to give rise to an obligation?

The entity must have no practical ability to avoid the obligation. (D) Signup and view all the answers

Obligations can arise not only from legally enforceable contracts but also from:

Custom, a desire to maintain good business relations, or a desire to act in an equitable manner. (D) Signup and view all the answers

A company has a present obligation arising from past events, but it cannot reliably measure the amount of the obligation. According to IAS 37, how should this be treated?

Disclose the obligation as a contingent liability. (D) Signup and view all the answers

A company won a court case in December Year 1. As of the December Year 1 reporting date, the opposing party has appealed the ruling. The company's lawyers advise that there is a 70% chance the company will ultimately win the appeal. How should the company account for this situation in its December Year 1 financial statements according to IAS 37?

Disclose a contingent asset, if the inflow of economic benefits is probable. (A) Signup and view all the answers

When an accountant determines that the existence of an asset is uncertain, what is the next step they should take?

Exercise professional judgment in determining whether the inflow of economic benefits is probable. (D) Signup and view all the answers

When deciding on the nature of an obligation, what factors should an accountant consider?

The probability of an outflow occurring and whether the amount of an obligation is reliably measurable. (D) Signup and view all the answers

Which of the following is true regarding the accounting treatment of a present obligation that probably requires an outflow of resources, according to IAS 37?

A provision should be recognized, and disclosures are required. (D) Signup and view all the answers

How does IAS 37 define a contingent liability arising from a past event?

A possible obligation whose existence will be confirmed by uncertain future events. (C) Signup and view all the answers

How are contingent liabilities measured?

Contingent liabilities are not measured - only disclosed (D) Signup and view all the answers

According to IAS 37, what information should be disclosed regarding a legal claim?

Brief description of the legal claim, best estimate of settlement amount, uncertainties surrounding settlement, and possibility of reimbursement. (C) Signup and view all the answers

Why might an entity be hesitant to provide extensive details about a legal claim?

For fear of prejudicing the outcome or jeopardizing settlement negotiations. (A) Signup and view all the answers

What should an accountant consider when disclosing information about a contingent liability?

The accountant must exercise professional judgement in meeting IAS 37 disclosure requirements without releasing sensitive information that could harm the entity. (B) Signup and view all the answers

According to IAS 37, how are contingent assets and contingent liabilities generally treated in the statement of financial position?

Both contingent assets and contingent liabilities are not recognized in the statement of financial position but are disclosed in the notes, except for some contingent liabilities in a business combination and contingent assets which are considered to be virtually certain. (A) Signup and view all the answers

When is a contingent asset disclosed in the notes to the financial statements?

When the inflow of future economic benefits is classified as virtually certain or probable but not virtually certain. (A) Signup and view all the answers

Under what condition should a contingent liability be disclosed in the notes to the financial statements?

When the probability of any outflow in settlement is not remote. (D) Signup and view all the answers

What is the objective of disclosing information about contingent assets and contingent liabilities?

To assist users in assessing the nature and amount of contingent assets and contingent liabilities of an entity. (C) Signup and view all the answers

Which of the probabilities need to be considered when applying criteria to contingent assets?

Virtually Certain, Probable but not Virtually Certain; and Not Probable (C) Signup and view all the answers

Which of the probabilities need to be considered when applying criteria to contingent liabilities?

Present obligation that probably requires an outflow of resources, possible obligation or present obligation that may, but probably will not, require an outflow of resources, possible obligation or present obligation where the likelihood of outflow of resources is remote, extremely rare case where there is a liability, but it cannot be measured reliably (A) Signup and view all the answers

What information can be obtained through the disclosure of information on contingent assets and liabilities for financial users?

Awareness of assets and liabilities that may affect an entity’s financial position in the future, enabling users to make informed decisions. (B) Signup and view all the answers

What is a key consideration in applying IAS 37 disclosure requirements for a legal claim?

Balancing the need for transparency with the potential harm from releasing sensitive information. (B) Signup and view all the answers

What is the primary function of the disclosures required by IAS 37 regarding provisions?

To provide users with an understanding of the reasons behind, and the uncertainty of, the recognised amount. (C) Signup and view all the answers

What is the role of professional judgement in disclosing information under IAS 37?

To balance the need for transparency with the potential harm of releasing sensitive information. (A) Signup and view all the answers

Why are contingent assets generally not recognized in the statement of financial position?

Because their existence is uncertain and recognition could mislead users. (A) Signup and view all the answers

What is the primary reason for disclosing contingent liabilities in the notes to the financial statements?

To provide users with a better understanding of the liabilities of an entity, whether arising from possible or present obligations. (B) Signup and view all the answers

According to IAS 37, what is a key characteristic of a contingent asset?

Its existence will be confirmed by uncertain future events not wholly within the entity's control. (D) Signup and view all the answers

Under what condition, if any, can a contingent asset be recognized in the statement of financial position, according to IAS 37?

When the inflow of economic benefits is virtually certain. (B) Signup and view all the answers

Which of the following best describes how contingent assets are treated in financial statements under IAS 37?

They are disclosed in the notes to the financial statements, unless the inflow of benefits is remote. (A) Signup and view all the answers

An entity is pursuing a claim through legal processes with an uncertain outcome. According to IAS 37, this claim is best described as:

A contingent asset. (C) Signup and view all the answers

A buyer is entitled to a full cash refund for faulty products purchased, has made a claim, but the supplier is disputing it. The dispute is being decided by an independent arbiter. Until the dispute is settled, the buyer has:

A contingent asset. (D) Signup and view all the answers

What is the primary reason for distinguishing between a 'contingent asset' and a typical 'asset' in financial reporting?

To reflect the level of certainty regarding the future inflow of economic benefits. (A) Signup and view all the answers

Which phrase in the definition of a contingent asset is MOST important for determining whether or not an asset is contingent?

Uncertain future events (A) Signup and view all the answers

Flashcards

Contingent Liabilities

Obligations that may arise based on the outcome of uncertain future events.

Contingent Assets

Possible assets arising from past events, confirmed by uncertain future events.