IAS 37 Provisions and Contingent Liabilities
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Questions and Answers

What is the primary accounting entry when recognizing a provision?

  • Dr Asset, Cr Cash
  • Dr P/L, Cr Provision (correct)
  • Dr Provision, Cr Asset
  • Dr Cash, Cr P/L

    • In which scenario would an onerous contract most likely be recognized?

  • When future operating losses can be avoided
  • When the costs to fulfill exceed the expected benefits (correct)
  • When the expected benefits exceed the costs to fulfill
  • When the contract is deemed profitable

    • How is the discount for a provision unwound in accounting entries?

  • By debiting finance costs and crediting provisions (correct)
  • By crediting cash and debiting provisions
  • By recognizing an expense in P/L
  • By reversing the initial recognition in equity

    • What happens to a provision when a reimbursement is recognized?

    <p>It is offset against the recognized reimbursement asset</p> Signup and view all the answers

    Which situation is NOT typically considered when recognizing provisions?

    <p>Unprofitable franchises</p> Signup and view all the answers

    What must be established to determine if a provision should be made for the costs of cleaning up contamination?

    <p>A reliable estimate of the cleaning costs</p> Signup and view all the answers

    In measuring provisions, what should the amount provided reflect?

    <p>The best estimate of expenditure required to settle the obligation</p> Signup and view all the answers

    What is the practice regarding making reliable estimates in the context of provisions?

    <p>It is generally expected to make reliable estimates</p> Signup and view all the answers

    Which describes the concept of 'most likely outcome' in the measurement of provisions?

    <p>The outcome with the highest probability based on available evidence</p> Signup and view all the answers

    What should be considered when estimating a warranty provision?

    <p>Expected values based on projected claims</p> Signup and view all the answers

    What is the primary purpose of creating an accounting standard?

    <p>To avoid the manipulation of profits</p> Signup and view all the answers

    Which journal entry correctly reflects the reversal of a provision?

    <p>Dr Provision (SOFP), Cr Expense (P/L)</p> Signup and view all the answers

    What defines a provision in accounting terms?

    <p>A liability of uncertain timing or amount</p> Signup and view all the answers

    Which of the following must be assessed to recognize a provision?

    <p>The probability of an outflow of resources</p> Signup and view all the answers

    A present obligation must arise from which of the following?

    <p>Past events leading to a contractual obligation</p> Signup and view all the answers

    How should the recognition of a provision be recorded in financial statements?

    <p>By debiting an expense and crediting the provision in the statement of financial position</p> Signup and view all the answers

    Which of the following is NOT a criterion for recognizing a provision?

    <p>Expectations of future profit increases</p> Signup and view all the answers

    Which statement accurately describes a liability?

    <p>It is a present obligation expected to result in an outflow of resources.</p> Signup and view all the answers

    What condition must be met for a provision to be recognized?

    <p>An outflow is probable and can be measured</p> Signup and view all the answers

    Which of the following is NOT a reason to make a provision?

    <p>Future operating losses</p> Signup and view all the answers

    What best describes a contingent liability?

    <p>It is disclosed unless the probability of an outflow is remote</p> Signup and view all the answers

    When can a reimbursement be recognized in relation to a provision?

    <p>Only when it is virtually certain to be received</p> Signup and view all the answers

    What is a decommissioning cost associated with?

    <p>Cost related to acquisition and use of an oil rig</p> Signup and view all the answers

    What is the measurement basis for a provision?

    <p>Best estimate of the amount of expenditure required</p> Signup and view all the answers

    Which of the following statements about contingent assets is true?

    <p>They are disclosed if there is a probable inflow</p> Signup and view all the answers

    What characterizes a contingent liability?

    <p>It represents a present obligation that may not result in an outflow.</p> Signup and view all the answers

    When should a contingent asset be disclosed?

    <p>If the inflow of economic benefits is probable</p> Signup and view all the answers

    A provision is made when there is a present obligation due to which of the following?

    <p>A past event</p> Signup and view all the answers

    Which of the following can lead to a reliable measurement of a provision?

    <p>An expected value for a large population of items</p> Signup and view all the answers

    What does the term 'unwind the discount' refer to?

    <p>Incrementally increasing the liability for future costs</p> Signup and view all the answers

    What condition might lead to a contingent liability not being recognized?

    <p>The obligation cannot be reliably measured</p> Signup and view all the answers

    Which of the following best describes a present obligation?

    <p>An obligation resulting from past events with a potential outflow</p> Signup and view all the answers

    What is included in the recognition of costs related to decommissioning?

    <p>Dismantling and restoration costs of an asset</p> Signup and view all the answers

    How should a contingent liability be disclosed in financial statements?

    <p>With a brief description and estimation of financial effect</p> Signup and view all the answers

    What is the main purpose of discounting decommissioning costs?

    <p>To reflect the time value of money in costs</p> Signup and view all the answers

    Which scenario aligns with recognizing a contingent asset?

    <p>Possible inflow due to uncertain future events</p> Signup and view all the answers

    Study Notes

    IAS 37 Provisions, Contingent Liabilities and Contingent Assets

    • IAS 37 outlines the accounting for provisions, contingent liabilities, and contingent assets
    • It aims to avoid manipulation of profits
    • Provision: A liability of uncertain timing or amount
    • A present obligation arising from past events
    • Expected outflow of resources
    • Contingent Liability: A possible obligation that may arise from past events
    • Outflow of economic benefits is not probable
    • Obligation cannot be measured reliably
    • Disclosed only if the outflow is not remote
    • Contingent Asset: A possible asset resulting from past events
    • Inflow of economic benefits is probable
    • Disclosed only if the inflow is probable

    Recognition Criteria for Provisions

    • Present Obligation: Does the entity have a legal or constructive present obligation arising from a past event?
    • Probable Outflow: Is an outflow of economic resources probable?
    • Reliable Estimate: Can a reliable estimate be made of the amount of outflow?

    Measurement of Provisions

    • Amount provided should be the best estimate at the end of the reporting period
    • Consider the expected values of a large population of items
    • Consider the most likely outcome of a single obligation
    • Follow IAS 37 measurement guidance

    Accounting Entries for Provisions

    • Recognize provision: Debit expense/asset, credit provision
    • "Unwind discount": Debit finance cost, credit provision
    • Use provision: Debit provision, credit cash
    • Reverse provision: Debit provision, credit expense/P&L

    Specific Scenarios

    • Future operating losses
    • Onerous contracts
    • Restructuring
    • Repairs and maintenance
    • Decommissioning costs
    • Self-insurance
    • Examples, such as warranties, legal claims, and environmental contamination, are often used throughout slides to illustrate provisions and contingent liabilities

    Reimbursements

    • Provision recognized by the reporting entity
    • The provision is offset by an income or asset

    Contingent Liabilities

    • Disclose if the outflow is not remote
    • Provide brief description
    • Give estimated financial effect
    • Include indication of uncertainty
    • Show possibility of reimbursement

    Contingent Assets

    • Disclose if an inflow is probable
    • Provide brief description
    • Provide estimated financial effect

    Summary

    • IAS 37 provides a framework for accounting for provisions, contingent liabilities, and contingent assets. This is important to prevent manipulation of financial statements and ensure accurate reflection of a company's obligations and potential gains.

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    Related Documents

    IAS 37 Provisions, Contingent Liabilities and Contingent Assets PDF

    Description

    This quiz explores IAS 37, which details the accounting for provisions, contingent liabilities, and contingent assets. Learn about key concepts including present obligations, probable outflows, and the criteria for recognizing provisions. Test your understanding of these essential accounting principles.

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