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Questions and Answers
What two types of obligations can give rise to a provision under PAS 37?
What two types of obligations can give rise to a provision under PAS 37?
What is the probability threshold for recognizing a provision according to PAS 37?
What is the probability threshold for recognizing a provision according to PAS 37?
Which condition must be satisfied for an obligation to be recognized as a provision?
Which condition must be satisfied for an obligation to be recognized as a provision?
What term describes the amount that an entity would pay to settle a present obligation?
What term describes the amount that an entity would pay to settle a present obligation?
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When should future events be considered in measuring provisions?
When should future events be considered in measuring provisions?
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How should provisions be measured if the time value of money is material?
How should provisions be measured if the time value of money is material?
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What happens if a provision does not meet the recognition criteria?
What happens if a provision does not meet the recognition criteria?
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Which of the following describes a constructive obligation?
Which of the following describes a constructive obligation?
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What is the main purpose of warranty provisions in accounting?
What is the main purpose of warranty provisions in accounting?
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What type of costs are associated with restructuring provisions?
What type of costs are associated with restructuring provisions?
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What accounting entry is made when the obligation for a provision is settled?
What accounting entry is made when the obligation for a provision is settled?
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Which of the following is a requirement for disclosing provisions under PAS 37?
Which of the following is a requirement for disclosing provisions under PAS 37?
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What is the total amount ABC Company should recognize as provision for warranties at the end of 2024?
What is the total amount ABC Company should recognize as provision for warranties at the end of 2024?
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What distinguishes provisions from contingent liabilities?
What distinguishes provisions from contingent liabilities?
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When can a reversal of unused provisions occur?
When can a reversal of unused provisions occur?
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What is the present value of the restoration cost for XYZ Mining Corp. if the future value is ₱5,000,000 and the discount rate is 8% over 10 years?
What is the present value of the restoration cost for XYZ Mining Corp. if the future value is ₱5,000,000 and the discount rate is 8% over 10 years?
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Which provision amount should DEF Corporation recognize based on the probable outcomes of their lawsuit?
Which provision amount should DEF Corporation recognize based on the probable outcomes of their lawsuit?
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In the example of ABC Company, what is the estimated warranty provision for the gadgets sold?
In the example of ABC Company, what is the estimated warranty provision for the gadgets sold?
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What is included in the settlement of a provision upon realization of the obligation?
What is included in the settlement of a provision upon realization of the obligation?
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What journal entry should XYZ Mining Corp. record for the environmental restoration provision?
What journal entry should XYZ Mining Corp. record for the environmental restoration provision?
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In the context of warranty provisions, how is the carrying amount of the provision presented?
In the context of warranty provisions, how is the carrying amount of the provision presented?
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What is the estimated total cost of warranty claims for ABC Company, given an average cost of ₱500 per claim?
What is the estimated total cost of warranty claims for ABC Company, given an average cost of ₱500 per claim?
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What is the nature of the obligation for the provision recorded by DEF Corporation?
What is the nature of the obligation for the provision recorded by DEF Corporation?
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Which of the following is NOT considered a type of provision discussed?
Which of the following is NOT considered a type of provision discussed?
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Study Notes
Philippine Accounting Standard (PAS) 37
- PAS 37 is based on IAS 37, with similar principles and guidelines for provisions, contingent liabilities, and contingent assets
- A provision is a liability with uncertain timing or amount, meeting these conditions:
- A present legal or constructive obligation stemming from past events
- It's probable an outflow of economic resources will be required to settle the obligation
- The amount of the obligation is reliably estimable
- Recognition criteria for provisions:
- Present Obligation: A past event creates a legal or constructive obligation; legal from contracts, laws, or agreements; constructive obligations arise from practices or public statements that create a valid expectation
- Probable Outflow of Resources: More likely than not (greater than 50% probability) that economic resources will be required to settle the obligation
- Reliable Estimate: The obligation's amount can be measured reliably
- Measurement of Provisions:
- Measured at the best estimate of the expenditure required to settle the present obligation
- Best estimate: the amount that an entity would rationally pay to settle the obligation or transfer it to a third party at the reporting date. Consider future events (e.g., changes in law, technology) and the time value of money (discounting provisions if material)
- Common examples of provisions:
- Warranty obligations
- Litigation provisions
- Restructuring provisions
- Environmental provisions
- Decommissioning or restoration costs
Accounting for Provisions
- Initial Recognition: Debit expense, credit provision
- Settlement of Obligation: Debit provision, credit cash/bank or payable account
- Reversal of Unused Provisions: Debit provision, credit reversal of provision (income)
Disclosure Requirements
- Entities must disclose the nature of the obligation, timing of outflows, uncertainties, and amounts in their financial statements
Examples
- Warranty Provisions: ABC Company sells gadgets with a one-year warranty. 5% of gadgets require repairs (10,000 gadgets sold, 500 requiring repairs at $500 each). Provision = $250,000
- Environmental Provisions: XYZ Mining Corp. has restoration costs estimated at $5,000,000 due in 10 years. Using an 8% discount rate, the present value of this cost is $2,315,950
- Litigation Provisions: DEF corporation is in a lawsuit. Legal counsel estimates an 80% chance of a $1,000,000 loss, and a 20% chance of a $1,500,000 loss. The provision to recognize is $1,000,000
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Description
This quiz explores the principles and guidelines of Philippine Accounting Standard (PAS) 37, which focuses on provisions, contingent liabilities, and contingent assets. It covers the recognition criteria for provisions and the necessary conditions for their measurement. Test your understanding of the legal and constructive obligations defined by PAS 37.
