b.
c.
d.
e.
Defective products (sales return)
Warranty claims
Premium liability
Asset retirement obligation (restoration,
rehabilitation cost)
How likely to
happen?
Can amount be
measured reliably?
Financial reporting
Provision
Contingent L.
Probable
Below
probable
No
Yes
Liability +
Notes
Notes only
Probable – more than 50% chance
Recognition of Provisions
a.
b.
c.
liability of uncertain timing or amount
entity has present obligation by past event.
probable outflow of resources
reliable estimate of amount.
Recognition of Contingent Liability
a. possible obligation from past event, whose
existence will be confirmed only by
occurrence/non-occurrence of uncertain
event.
b. possible obligation from past event but
not recognized because
i.
no probable outflow of resources
ii.
no reliable estimate.
Measuring Obligation
- best estimate at end of reporting period.
a. to settle obligation at the end of reporting
period.
b. to transfer it to third party at that time.
Judgement of entity’s management – primary
basis of obligation’s outcome and financial effects.
Provision
Within 12 months
Face value
More than 12 months
Present value
Discount rate shall be pre-tax rate that reflects:
a. current market assessments of time value of
money; and
b. the risks specific to the liability.
Specific measurement guidelines
1. Expected value
- involves large population, weight all
possible outcome amounts
associated w/probabilities
- measurement of provision depends
on likelihood of loss happening.
2. Mid-point of range
- there is continuous range of possible
outcomes and each point in that
range is likely as any other.
Mid-point = lower limit + upper limit / 2
3. Events after the reporting period
- “adjusting events”
- contingent liability settled after
reporting date, effects:
a. amount of actual settlement shall be
the measurement.
b. confirms that entity has existing and
probable obligation as of reporting
date.
4. Plaintiff’s offer of out of court settlements
- shall not solely be considered as
measurement of provision.
5. Future events
- includes but not limited to:
a. technological advances that may
affect costs of settling obligation in
the future.
b. New legislation when sufficient
evidence exists that the legislation is
virtually certain to be enacted to.
6. Expected gain from disposal of asset
- shall not be considered in measuring
amount of provision.
Journal Entries:
a. Recognition of provision
Loss on provision
Provision
xx
xx