PAS 37 Quiz: Provisions, Contingent Liabilities and Assets

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Questions and Answers

What is the main objective of PAS 37?

To improve the quality of financial reporting

To reduce the number of provisions in financial statements

To ensure timely disclosure of contingent liabilities

To ensure appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets (correct)

Which of the following is excluded from the scope of PAS 37?

Provisions arising from executory contracts (correct)

Contingent assets from investments

Provisions resulting from onerous contracts

Contingent liabilities from sales contracts

What is a provision, according to PAS 37?

A liability of certain timing and amount

A contingent asset of certain value

A liability of uncertain timing or amount (correct)

An asset of uncertain value

Which entities are required to apply PAS 37?

All entities, except those covered by another Standard Signup and view all the answers

What is the purpose of sufficient disclosure in the notes to the financial statements?

To enable users to understand the nature, timing and amount of provisions, contingent liabilities and contingent assets Signup and view all the answers

What is the ultimate goal of PAS 37?

To ensure that users have a faithful representation of a company's financial position Signup and view all the answers

How is a provision for a one-off event measured?

At the most likely amount Signup and view all the answers

What is the purpose of discounting the provision at present value?

To reflect the current market assessments of the time value of money and the risks specific to the liability Signup and view all the answers

What happens to the reimbursement amount if it is virtually certain that reimbursement will be received?

It is recognised as a separate asset Signup and view all the answers

What is the treatment of contingent liabilities?

They are disclosed but not recognised Signup and view all the answers

When should a contingent asset be recognised?

When the realisation of income is virtually certain Signup and view all the answers

How are provisions for large populations of events measured?

At a probability-weighted expected value Signup and view all the answers

What is a contingent liability?

A possible obligation depending on whether some uncertain future event occurs Signup and view all the answers

What is the condition for an entity to recognize a provision?

A present obligation has arisen from a past event, and payment is probable and can be estimated reliably Signup and view all the answers

What is an obligating event?

An event that creates a legal or constructive obligation Signup and view all the answers

What is a constructive obligation?

An obligation that arises from past practice, creating a valid expectation on the part of a third party Signup and view all the answers

What is the treatment of a contingent liability?

It is disclosed but not accrued Signup and view all the answers

Under what condition is disclosure of a contingent liability not required?

If payment is remote Signup and view all the answers

Study Notes

Measurement of Provisions

The amount recognised as a provision should be the best estimate of expenditure required to settle the present obligation at the reporting date.
Provisions for one-off events are measured at the most likely amount.
Provisions for large populations of events are measured at a probability-weighted expected value.
Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
If reimbursement is expected, it should be recognised as a separate asset, not as a reduction of the provision, only when it is virtually certain.

Contingent Liabilities and Assets

Contingent liabilities are not recognised, but disclosed unless the possibility of an outflow of economic resources is remote.
Contingent assets are not recognised, but disclosed where an inflow of economic benefits is probable.
When the realisation of income is virtually certain, the related asset is not a contingent asset and its recognition is appropriate.

PAS 37 - Provision, Contingent Liabilities and Contingent Assets

Objective: ensure appropriate recognition criteria and measurement bases are applied, and sufficient information is disclosed to enable users to understand the nature, timing, and amount of provisions, contingent liabilities, and contingent assets.
Scope: applies to all entities in accounting for provisions, contingent liabilities, and contingent assets, except those resulting from executory contracts and those covered by another Standard.

Overview of Provisions, Contingent Liabilities and Contingent Assets

Definition of a provision: a liability of uncertain timing or amount.
Definition of a contingent liability: a possible obligation depending on an uncertain future event or a present obligation but payment is not probable or the amount cannot be measured reliably.
Definition of a contingent asset: a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Recognition and Measurement

Recognition of provisions: an entity must recognise a provision if, and only if, a present obligation (legal or constructive) has arisen, payment is probable, and the amount can be estimated reliably.
An obligating event is an event that creates a legal or constructive obligation and results in an entity having no realistic alternative but to settle the obligation.
A constructive obligation arises if past practice creates a valid expectation on the part of a third party.

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Description

This quiz covers the objectives and scope of PAS 37, including recognition criteria and measurement bases for provisions, contingent liabilities, and contingent assets. It also discusses disclosure requirements in financial statements.