Lovely A.

Cabug-os BSA-2A

Assignment # 8

1 Explain the meaning of a provision.

Its uncertainty is what distinguishes or differentiates it from other liabilitie
The date when the obligation is due is indefinite
Sometimes, the payee cannot be identified or determined.
It is an estimated liability or loss contingency that is accrued because it is
probable and measurable.
2 What are the three conditions necessary for the recognition a provisio
liability?
Per PAS 37, a provision shall be recognized as a liability in the financial s
following conditions:
1 The entity has a present obligation, legal or constructive, as a result of pas
2 Probable that an outflow of resources embodying economic benefits woul
to settle the obligation.
3 The amount of the obligation can be measured reliably.
3 What is a legal obligation?
Is an obligation arising from a contract, legislation or other operation of la
4 What is a constructive obligation?
derived from an entity's actions where:
a the entity has indicated to other parties that it will accept certain responsib
by reason of an established pattern of practice, pubished policy, or a suffic
specific current statement.
b And as result, the entity has created a valid expectation on the part of othe
that it will discharge those responsibilities.
6 Explain the terms probable, possible and remote in relation to a provis
As a rule of thumb:
Probable means more than 50% likely or substantially more.
Possible means 50% or less likely to occur.
Remote means 10% or less likely to occur or very slight occurre
7 What is the measurement of a provision?
A provision is measured at the amount that the entity would rationally pay
obligation at the end of the reporting period or to transfer it to a third party
8 Explain a restructuring provision
Restructuring provision is required because a constructive obligation ma
decision to restructure when two condition are present:
1 The entity has a detailed formal plan to restructuring.
2 The entity has raised valid expectation in the minds of those affected that t
will carry out the restructuring by starting to implement the plan and anno
main features to those affected by it.
9 Define a contingent liability.
PAS 37, paragraph 10, defines contingent liability in two ways as follows:
 1 it is a possible obligation that arises from past event and whose existence w
only by the occurrence or nonoccurrence of one or more uncertain future e
not wholly within the control of the entity.
2 a present obligation that arises from past event but is not recognized beca
probable that an outflow of resources embodying economic benefits will b
to settle the obligation or the amount of the obligation cannot be measured
10 Distinguish a contingent liability from a provision.
The present obligation is either probable or measurable but not both to be
While if the present obligation is probable and amount can be measured r
contingent liability but shall be recognized as provision.
11 Explain the treatment of a contingent liability.
A contingent liability shall not recognized in the financial statement but sh
The required disclosure are:
a Brief description of the nature of the contingent liability
b An estimate of its financial effects.
c An indication of the uncertainties that exist.
d Possibility of any reimbursement
If a contingent liability is remote, no disclosures is necessary.
12 Define a contingent asset.
PAS 37, paragraph 10, provides the following definitions:
1 a possible asset that arises from past event and whose existence will be co
only by the occurrence or nonoccurrence of one or more uncertain future e
not wholly within the the control of the entity.
2 A contigent asset shal not be recognized because this may result to recogn
income that may never be realized.
13 Explain the treatment of a contingent asset.
A contingent asset becomes a realized asset recordable on the balance shee
associated with it becomes relatively certain. In this case, the asset is recog
14 What is a decommissioning liability.
A decommisionig liability is an obligation to dismantle, remove and resto
of property, plant and equipment as required by law or contract.
Also called asset retirement obligation.
15 Explain the treatment of a decommissioning liability.
Decommissioning of production assets may be required by law, the terms
All of these, according to Conceptual Framework and IAS 37 Provisions,
differentiates it from other liabilities.

ied or determined.
gency that is accrued because it is

ary for the recognition a provision as a

nized as a liability in the financial statements under the

al or constructive, as a result of past event.

mbodying economic benefits would be required

easured reliably.

legislation or other operation of law.

that it will accept certain responsibilities

ractice, pubished policy, or a sufficiently

alid expectation on the part of other parties

and remote in relation to a provision.

% likely or substantially more.

kely to occur.
kely to occur or very slight occurrence.

that the entity would rationally pay to settle the

riod or to transfer it to a third party at that time.

ause a constructive obligation may arise for the

ion are present:
restructuring.
in the minds of those affected that the entity
ng to implement the plan and announcing the

ent liability in two ways as follows:

m past event and whose existence will be confirmed
ce of one or more uncertain future events

st event but is not recognized because it is not

mbodying economic benefits will be required
the obligation cannot be measured reliably.
m a provision.
e or measurable but not both to be considered a contingent liability
able and amount can be measured reliably, the obligation is not
zed as provision.

zed in the financial statement but shall be disclosed only.

ntingent liability

isclosures is necessary.

lowing definitions:
ent and whose existence will be confirmed
ce of one or more uncertain future events

d because this may result to recognition of

ingent asset.
asset recordable on the balance sheet when the realization of cash flows
rtain. In this case, the asset is recognized in the period when the change in status occurs.

tion to dismantle, remove and restore an item

quired by law or contract.

ssioning liability.
may be required by law, the terms of operating licences (Legal obligation) or an entity’s stated policy and past practice (Cons
ramework and IAS 37 Provisions, Contingent Liabilities and Contingent Assets , create an obligation and thus a liability.
xx Per analysis
xx Per book
y and past practice (Constructive obligation).
n and thus a liability.
Per analysis