Module 8

Accounting for Provisions; Revenue Contracts; Employee Benefits and Share based
Payment
Week 14
Assessments
Task:
1. Discuss on how to identify provisions and revenue contracts
Provision
A provision is an existing liability of uncertain timing or uncertain amount.
Provisions are estimated liability because it is both probable and measurable.
Revenue Contracts
IFRS 15 Revenue from Contracts with Customers applies to all contracts with
customers except for: leases within the scope of IAS 17 Leases; financial instruments and
other contractual rights or obligations within the scope of IFRS 9 Financial Instruments,
IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27
Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures;
insurance contracts within the scope of IFRS 4 Insurance Contracts; and nonmonetary
exchanges between entities in the same line of business to facilitate sales to customers or
potential customers.

2. Explain the recognition and measurement of provisions and revenue contracts

Recognition of Provision
A provision is recognized when:
A. An entity has a present obligation (legal or constructive) because of
past event;
B. It is probable that an outflow of resources embodying economic
benefits will be required to settle obligation.
C. A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognized.
Measurement of Provisions
The amount recognized as a provision should be the best estimate of the
expenditure required to settle the present obligation at the financial reporting date.
Consideration in determining best estimate:
1. Risks and uncertainties that surround the underlying events.
2. Future events
A. Forecast reasonable changes in applying existing technology
B. Ignore possible gains on sale of assets
C. Consider changes in legislation only if virtually certain to be
enacted
 3. Discounted present value using a pre-tax discount rate that reflects the current
market assessments of the the value of money and the risks specific to the liability.
4. Reimbursement by another party. The reimbursement should be recognized as a
separate asset provided it is virtually certain that reimbursement will be received if the
entity settles the obligation. The amount recognized as an asset should not exceed the
amount of the provision and it should not be treated as a reduction of the required
provision.
5. Gains on expected disposal of assets.
An entity recognizes gains on expected disposals of assets at the time of disposition
of assets.
6. Presence of onerous contact
If an entity has an onerous contract, the present obligation under the contract shall
be recognized and measured as a provision.
7. Re-measurement of provisions
The following shall be performed when measuring provisions after initial
recognition.
A. Review and adjust provisions at each reporting date.
B. If an outflow no longer probable, provision is reversed.
8. Use of provisions
If it is no longer probable that an outflow of resources will be required to settle the
obligation, the provision should be reversed.

Recognition and Measurement of Revenue

Generally, revenue is recognized when entity has transferred promised goods or services
to the customer. IFRS 15 sets out five steps for the recognition process:
1. Identify the contract with the customer
2. Identify the separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when (or as) performance is satisfied

3. Differentiate between the employee benefits and share based payments

Employee Benefits

These are all forms of consideration given by an entity in exchange for services rendered
or for the termination of employment.

Classification of Employee Benefits

1. Short-term employee benefits are employee benefits (other than termination benefits)
that are expected to be settled wholly before twelve months after the end of the annual
reporting period in which the employees render the related services.
Examples of short-term employee benefits:
A. Wages, salaries and social security contributions
B. Compensated absences(paid vacation and sick leave)
C. Profit sharing and bonuses
D. Non-monetary benefits
2. Post-employment benefits employee benefits payable after the completion of
employment (excluding termination and short term benefits), such as:
A. Retirement benefits (e.g. pensions, lump sum payments)
B. Other post-employment benefits (e.g. post-employment life insurance, medical
care).
Two types of post-employment benefit plans
A. Defined contribution plan - are post-employment benefit plans under which an
entity pays fixed contributions into a separate entity (a fund) and will have no legal or
constructive obligation to pay further contributions if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service in the current and prior
periods.
B. Defined benefit plan - these are post-employment plans other than defined
contribution plans. These would include both formal plans and those informal practices
that create a constructive obligation to the entity’s employees.
3. Other long-term employee benefits include items such as the following, if not
expected to be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related service:
A. Long term paid absences such as long service or sabbatical leave
B. Jubilee or other long service benefits
C. Long term disability benefits
D. Profit sharing and bonuses
E. Deferred remuneration
4. Termination benefits an employee benefits provided in exchange for the termination
of an employee’s employment, as a result of either:
A. An entity’s decision to terminate an employee or group employee before the
normal retirement date; or
B. An employee’s decision to accept an offer of benefits in exchange for the
termination of employment.

Share-based Payments
A share-based payment is a transaction in which the entity receives goods or
services as consideration for equity instruments of the entity (including shares or share
options), or acquires goods or services for amounts that are based on the price of the
entity’s shares or other equity instruments of the entity.
 Types of Share-based Payments Transactions
1. Equity settled
The entity issues equity instruments in consideration for services received, e.g.,
stock options.
2. Cash settled
The entity incurs a liability for services received and liability is based on the
entity’s
equity instruments, e.g., stock appreciation rights.
3. Share-based payments with cash alternatives
a. Originally equity-settled and cash settled was subsequently added, or
b. Granted simultaneously

4. Discuss the presentation and disclosure of provisions, revenue contracts in the financial
statements

5. Differentiate between employee benefits and share based payments