Philippine Accounting Standard (PAS) 37
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Questions and Answers

What two types of obligations can give rise to a provision under PAS 37?

  • Legal and constructive obligations (correct)
  • Constructive and implied obligations
  • Earned and unearned obligations
  • Legal and apparent obligations

    • What is the probability threshold for recognizing a provision according to PAS 37?

  • More than 50% (correct)
  • 50%
  • 60%
  • 30%

    • Which condition must be satisfied for an obligation to be recognized as a provision?

  • The amount of the obligation must be able to be reliably estimated. (correct)
  • The obligation can be ignored if it’s remote.
  • Future economic benefits must exceed future obligations.
  • All past events must result in an economic loss.

    • What term describes the amount that an entity would pay to settle a present obligation?

    <p>Best Estimate (B)</p> Signup and view all the answers

    When should future events be considered in measuring provisions?

    <p>If there is sufficient objective evidence that they will occur. (C)</p> Signup and view all the answers

    How should provisions be measured if the time value of money is material?

    <p>Discounted to their present value (D)</p> Signup and view all the answers

    What happens if a provision does not meet the recognition criteria?

    <p>It is disclosed as a contingent liability. (C)</p> Signup and view all the answers

    Which of the following describes a constructive obligation?

    <p>An obligation arising from a company's established practices or public statements. (D)</p> Signup and view all the answers

    What is the main purpose of warranty provisions in accounting?

    <p>To cover costs of future repairs or replacements of sold products (C)</p> Signup and view all the answers

    What type of costs are associated with restructuring provisions?

    <p>Costs related to approved and announced restructuring plans (B)</p> Signup and view all the answers

    What accounting entry is made when the obligation for a provision is settled?

    <p>Debit: Provision for specific liability, Credit: Cash/Bank or Other Payable Account (A)</p> Signup and view all the answers

    Which of the following is a requirement for disclosing provisions under PAS 37?

    <p>The carrying amount of the provision at the beginning and end of the reporting period (D)</p> Signup and view all the answers

    What is the total amount ABC Company should recognize as provision for warranties at the end of 2024?

    <p>₱250,000 (A)</p> Signup and view all the answers

    What distinguishes provisions from contingent liabilities?

    <p>Provisions are recognized as liabilities when criteria are met, while contingent liabilities are only disclosed (C)</p> Signup and view all the answers

    When can a reversal of unused provisions occur?

    <p>If it is no longer probable that an outflow of resources will be required (C)</p> Signup and view all the answers

    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?

    <p>₱2,315,950 (C)</p> Signup and view all the answers

    Which provision amount should DEF Corporation recognize based on the probable outcomes of their lawsuit?

    <p>₱1,000,000 (B)</p> Signup and view all the answers

    In the example of ABC Company, what is the estimated warranty provision for the gadgets sold?

    <p>₱100,000 (B)</p> Signup and view all the answers

    What is included in the settlement of a provision upon realization of the obligation?

    <p>Cash/Bank or other payable account is credited (C)</p> Signup and view all the answers

    What journal entry should XYZ Mining Corp. record for the environmental restoration provision?

    <p>Debit: Environmental Restoration Expense ₱2,315,950; Credit: Provision for Restoration ₱2,315,950 (C)</p> Signup and view all the answers

    In the context of warranty provisions, how is the carrying amount of the provision presented?

    <p>₱250,000 (A)</p> Signup and view all the answers

    What is the estimated total cost of warranty claims for ABC Company, given an average cost of ₱500 per claim?

    <p>₱250,000 (D)</p> Signup and view all the answers

    What is the nature of the obligation for the provision recorded by DEF Corporation?

    <p>Expected settlement of lawsuit (C)</p> Signup and view all the answers

    Which of the following is NOT considered a type of provision discussed?

    <p>Insurance provision (A)</p> Signup and view all the answers

    Flashcards

    Provision (PAS 37)

    A liability with uncertain timing or amount, arising from a past event, where an outflow of economic benefits is probable and estimable.

    Present Obligation (PAS 37)

    A legal or constructive obligation resulting from a past event, creating a valid expectation for payment.

    Probable outflow of resources

    There is more than a 50% chance of needing to pay.

    Reliable estimate (PAS 37)

    The ability to accurately determine the outflow amount.

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    Legal Obligation

    A binding agreement or contract that creates a requirement to pay.

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    Constructive Obligation

    An implied obligation stemming from actions that create expectations of payment.

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    Best estimate (measurement)

    Most rational payment amount for settling a liability.

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    Discounting (provisions)

    Taking into account the time value of money when measuring provisions.

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    Warranty Provision

    Estimated cost of fulfilling warranty claims on products sold.

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    Environmental Provision

    Estimated cost of restoring land after mining operations.

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    Litigation Provision

    Estimated cost of settling a lawsuit expected to be lost.

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    Present Value

    Current worth of a future sum or stream of cash flows.

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    Probable Loss

    A highly likely loss/outcome, close to 100% chance.

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    Best Estimate

    The most likely outcome in a given scenario.

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    Provision Journal Entry

    The accounting entry to recognize a provision.

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    Provision Disclosure

    Revealing details of provisions in financial statements.

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    Warranty Obligations

    Expected costs for warranties provided with products sold.

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    Provisions (accounting)

    Recognized liabilities when the criteria are met for probable future outflow of resources.

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    Contingent Liabilities

    Disclosed in the notes to the financial statements when a present obligation exists, but it's not probable or reliable to estimate an outflow(resource).

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    Initial Recognition (Provisions)

    Debit an expense account (e.g., warranty expense) and credit a provision account for the estimated cost.

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    Settlement of Obligation (Provisions)

    When the obligation is settled, debit the provision account and credit cash, bank, or other payable accounts.

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    Reversal of Unused Provisions

    Debit provision account and credit reversal of provision if outflow of resources is no longer probable.

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    Disclosure Requirements (PAS 37)

    Financial statements must disclose nature of obligation, expected outflows, uncertainties of amount/timing, carrying amount (start/end), additional provisions, amounts used/reversed, expected reimbursements.

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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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    Related Documents

    Philippine Accounting Standards (PAS) 37 Provisions, Contingent Liabilities, and Contingent Assets PDF

    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.

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