31 Lecture

1. What is a provision under IAS 37? A) Possible obligations that depend on the occurrence of a future event B) Present obligation arising from a past event C) Possible assets that depend on the occurrence of a future event D) All of the above

Answer: B

2. Which of the following is an example of a provision? A) Probable future profits B) Future research and development costs C) Restructuring costs D) All of the above

Answer: C

3. What is a contingent liability? A) A present obligation arising from a past event B) A possible obligation that depends on the occurrence of a future event C) A possible asset that depends on the occurrence of a future event D) None of the above

Answer: B

4. When is a contingent asset recognized in the financial statements? A) When the inflow of economic benefits is virtually certain B) When the outflow of economic resources is probable C) When the occurrence of a future event is virtually certain D) None of the above

Answer: A

5. Which of the following is an example of a contingent liability? A) Future research and development costs B) A pending lawsuit C) Probable future profits D) None of the above

Answer: B

6. What is the criteria for recognizing a provision? A) Possible obligation that depends on the occurrence of a future event B) Present obligation arising from a past event C) Virtually certain inflow of economic benefits D) All of the above

Answer: B

7. When is a contingent liability disclosed in the financial statements? A) When the occurrence of a future event is probable, and the amount of the obligation can be estimated reliably B) When the outflow of economic resources is probable C) When the inflow of economic benefits is virtually certain D) None of the above

Answer: A

8. What is the measurement basis for provisions? A) Cost B) Fair value C) Best estimate of the expenditure required to settle the obligation D) All of the above

Answer: C

9. Which of the following is an example of a contingent asset? A) A pending lawsuit B) A potential customer C) Future research and development costs D) None of the above

Answer: B

10. What is the criteria for recognizing a contingent liability? A) Probable future profits B) A present obligation arising from a past event C) Possible obligation that depends on the occurrence of a future event D) Probability of the future event and reliability of the estimate

Answer: D

1. What is a provision? Provide examples of situations where provisions might be created. Answer: A provision is a liability of uncertain timing or amount that a company expects to incur in the future. Examples of situations where provisions might be created include warranty claims, legal settlements, environmental cleanup costs, restructuring costs, and employee benefits.

2. What is the difference between a provision and a contingent liability? Answer: A provision is a liability of uncertain timing or amount that a company expects to incur in the future, while a contingent liability is a possible obligation that arises from past events but whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

3. How are provisions measured and recognized in financial statements? Answer: Provisions are measured at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period and recognized as a liability in the statement of financial position, with a corresponding charge to the statement of comprehensive income.

4. What is the difference between a restructuring provision and an onerous contract provision? Answer: A restructuring provision is created when a company decides to restructure its operations, such as closing down a plant or laying off employees. An onerous contract provision is created when a company has a contract that is no longer profitable and is expected to result in a future net cash outflow.

5. What is a contingent asset? Provide examples of situations where a contingent asset might arise. Answer: A contingent asset is 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. Examples of situations where a contingent asset might arise include legal claims against third parties, insurance claims, and tax refunds.

6. What is the accounting treatment for a contingent asset? Answer: A contingent asset is not recognized in the financial statements because its existence is uncertain. However, if it is virtually certain that the asset will be received, then it may be disclosed in the notes to the financial statements.

7. How are contingent liabilities disclosed in the financial statements? Answer: Contingent liabilities are disclosed in the notes to the financial statements unless the possibility of an outflow of resources is remote.

8. What is the difference between a legal claim and a constructive obligation? Answer: A legal claim arises when a third party makes a claim against the company that is legally enforceable. A constructive obligation arises from past events that give rise to a moral obligation to pay or perform but where there is no legal obligation.

9. How is the likelihood of a contingent liability assessed? Answer: The likelihood of a contingent liability is assessed by considering the available evidence and the possibility of future events.

10. What is the difference between a provision and a reserve? Answer: A provision is a liability of uncertain timing or amount that a company expects to incur in the future, while a reserve is a portion of retained earnings that has been set aside for a specific purpose, such as future expansion or dividend payments. Reserves are not recognized as liabilities in the statement of financial position.

Provisions, Contingent Assets, and Contingent Liabilities are all related to events that may affect the financial position of a company in the future. Provisions are liabilities of uncertain timing or amount, where the company has a present obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation. Contingent Assets and Liabilities are potential assets or liabilities that may arise from an uncertain event. A Contingent Asset is 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. A Contingent Liability is a possible obligation 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. The recognition of Provisions, Contingent Assets, and Contingent Liabilities involves a high degree of judgment and is governed by International Accounting Standard (IAS) 37. The standard requires the entity to recognize a provision when a present obligation exists as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. For Contingent Assets, they should not be recognized unless their realization is virtually certain. On the other hand, Contingent Liabilities should be recognized if the probability of the obligation arising is more likely than not. Disclosure requirements for Provisions, Contingent Assets, and Contingent Liabilities include the nature of the obligation, the amount recognized, and uncertainties surrounding the amount and timing of the outflow of resources. These disclosures are essential to enable the users of financial statements to assess the nature and extent of the risks and uncertainties to which the entity is exposed. In conclusion, Provisions, Contingent Assets, and Contingent Liabilities are critical components of financial reporting, and proper recognition and disclosure are essential to provide transparent and reliable information to the users of financial statements.