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Chapter 4: Provision (Contingent Liability)

Provisions are liabilities of uncertain timing or amount. They may be estimated liabilities or loss contingencies that are accrued if probable and measurable. Provisions are measured based on single or multiple possible outcomes, adjusted for risks. Future events affecting obligations are considered if evidence suggests they will occur. Gains from asset disposal are excluded. Reimbursements are recognized if virtually certain. Provisions are reviewed and adjusted annually. They are used only for intended expenditures. Future operating losses are not provisioned. Onerous contracts' minimum cost to exit is provisioned. Restructuring provisions cover direct costs of detailed, announced plans. Contingent liabilities may become obligations depending on future events, while contingent assets depend on future

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482 views2 pages

Chapter 4: Provision (Contingent Liability)

Provisions are liabilities of uncertain timing or amount. They may be estimated liabilities or loss contingencies that are accrued if probable and measurable. Provisions are measured based on single or multiple possible outcomes, adjusted for risks. Future events affecting obligations are considered if evidence suggests they will occur. Gains from asset disposal are excluded. Reimbursements are recognized if virtually certain. Provisions are reviewed and adjusted annually. They are used only for intended expenditures. Future operating losses are not provisioned. Onerous contracts' minimum cost to exit is provisioned. Restructuring provisions cover direct costs of detailed, announced plans. Contingent liabilities may become obligations depending on future events, while contingent assets depend on future

Uploaded by

Jen Bernadette Ciego
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© © All Rights Reserved
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[Type the document title]

CHAPTER 4: PROVISION (CONTINGENT LIABILITY)


Provision - an existing liability of uncertain timing and uncertain amount.
- may be the equivalent of an estimated liability or a loss contingency that is accrued because it is both probable and
measurable.
Measurement:
Where a single obligation is being measured, the individual most likely outcome adjusted for the effect of other possible
outcomes may be the best estimate.
Where there is a continuous range of possible outcomes and each point in that range is as likely as any other, the midpoint of the
range is used.
Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible
outcomes by their associated possibilities.
Other Measurements:
1. Risks and uncertainties. The risks and uncertainties that inevitably surround events and circumstances shall be taken into
account in reaching the best estimate of a provision.
2. Present value of obligation. The risks and uncertainties that inevitably surround events and circumstances shall be taken into
account in reaching the best estimate of a provision.
3. Future events. Future events that affect the amount required to settle an obligation shall be reflected in the amount of a
provision where there is sufficient evidence that they will occur.
4. Expected disposal of assets. Gains from expected disposal of assets shall not be taken into account in measuring a provision.
5. Reimbursements. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party, the reimbursement shall be recognized when it is virtually certain that reimbursement would be received if the entity
settles the obligation.
6. Changes in provision. Provisions shall be reviewed at every end of the reporting period and adjusted to reflect the current best
estimate.
7. Use of provision. A provision shall be used only for expenditures for which the provision was originally recognized.
8. Future operating losses. Provision shall not be recognized for future operating losses.
9. Onerous contract. The present obligation under the contract shall be recognized and measured as a provision.
The lower amount between the cost of fulfilling the contract and the compensation arising from the failure to fulfill the
contract is the least cost of exiting from the contract.
Restructuring - a program that is planned and controlled by management and materially changes in either the scope of a business of
an entity or the manner in which that business is conducted (PAS 37 par. 10)

Provision for Restructuring:


An entity has a detailed formal plan for the restructuring.
The entity has raised valid expectation in the minds of those affected that the entity will carry out the restructuring by starting to
implement the plan and announcing the main features to those affected by it.
Amount of Restructuring - shall include only direct expenditures arising from the restructuring
Contingent liability - a possible obligation that arises from past event 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 present obligation that arises from past event but is not recognized because it is not probable that an outflow of
resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measure
reliably
Treatment:
It shall not be recognized in the financial statements but shall be disclosed only.
If it is remote, no disclosure is necessary.
Contingent Asset - a possible asset that arises from past event 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 possible asset that arises from past event 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
Treatment:
[Type the document title]
It shall not be recognized because this may result to recognition of income that may never be realized.
It is only disclosed when it is probable.
If it is only possible or remote, no disclosure is required.
Change In Decommissioning Liability:
1. A decrease in the liability is deducted from the cost of the asset.
2. An increase in liability is added to the cost at the asset.

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