TOPIC LEARNING OUTCOME:

TOPIC # 4:
PROVISIONS, Distinguish the different types of liabilities as to
their characteristics, recognition, measurement,
CONTINGENT presentation and disclosure requirements,
including their interest components.
LIABILITIES &
CONTINGENT
ASSETS

READING ASSIGNMENT

Note: While reading Chapter 4, draft out your personal summary notes on your notebook. Your instructor
highly encourages that you use illustrations, diagrams, tables and the like. Be creative! These personal
summary notes will become extremely useful by the time you reach your final year in the Accountancy
program and during your formal review for the CPA Licensure Examination, so make sure to give your
best in simplifying what you can! 

LECTURE NOTES

Provisions
 A provision is a liability of uncertain timing or amount.
 Provisions differ from other liabilities because of the uncertainty about the timing or amount of
expenditure required in settlement. Unlike for other liabilities, provisions must be estimated.
Although, some other liabilities are also estimated, their uncertainty is generally much less than for
provisions.
 Other liabilities, such as accruals, are reported as part of “Trade and other payables” whereas provisions
are reported separately.

Provision vs. Contingent liability

Recognition of provisions
A provision is recognized when all of the following conditions are met:
1. The entity has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
3. A reliable estimate can be made of the amount of the obligation.

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Measurement

Present value
Where the effect of the time value of money is material, the amount of a provision shall be the present value
of the expenditures expected to be required to settle the obligation.

Expected disposal of assets

Gains from the expected disposal of assets shall not be taken into account in measuring a provision. Gains
shall be recognized only when the assets are actually disposed of.

Reimbursements
 Where some or all of the expenditure required in settling a provision is expected to be reimbursed by
another party, the reimbursement is recognized only when it is virtually certain that reimbursement
will be received if the entity settles the obligation.
 The reimbursement shall be treated as a separate asset.
 In the statement of profit or loss and other comprehensive income, the expense relating to a provision
may be presented net of the amount recognized for a reimbursement.

Changes in provisions
 Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current
best estimate.
 If it is no longer probable that an outflow of resources embodying economic benefits will be required
to settle the obligation, the provision shall be reversed.

Product warranties and guarantees

 If a customer has the option to purchase a warranty separately (for example, because the warranty
is priced or negotiated separately), the warranty is accounted for in accordance with PFRS 15 Revenue
from Contracts with Customers.
 If a customer does not have the option to purchase a warranty separately, the warranty is accounted
for in accordance with PAS 37 Provisions, Contingent Liabilities and Contingent Assets unless the
promised warranty provides the customer with a service in addition to the assurance that the product
complies with agreed-upon specifications.

Liability for premiums

 A customer option to acquire additional goods or services for free or at a discount is accounted for
under PFRS 15 if the option provides the customer a material right that the customer would not
receive without entering into that contract.
 A customer option that does not provide the customer with a material right is not accounted for under
PFRS 15; and therefore, accounted for in accordance with PAS 37.

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Guarantee for indebtedness of others
A provision for the guarantee for indebtedness of others is recognized when it becomes probable that the
entity will be held liable for the guarantee, such as when the original debtor defaults on the loan.

Contingent assets

CONCEPTUAL PORTFOLIO

1. Differentiate provisions from contingent liabilities as to:

a. Recognition

b. Derecognition

c. Measurement

d. Presentation

e. Disclosure

2. What is a contingent asset, when and how is it recognized?

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