IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Which of the following criteria must be met for a provision to be recognised?

• An entity has a present obligation (legal or constructive) as a result of a past event

• An entity has a past obligation (legal or constructive) as a result of a past event

• It is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation

• A reliable estimate can be made of the amount of the obligation

• The amount of the obligation is know

Which of the following statements regarding contingent assets is accurate?

• It is always recognized in the financial statements

• It is recognized in the financial statements only where inflow of economic benefit is probable

• It is always disclosed in the financial statements

• It is disclosed only where inflow of economic benefit is probable

A constructive obligation to restructure arises only when an entity has:

• A detailed formal plan for restructuring

• A detail informal plan for the restructuring

• Raised a valid expectation with management that restructuring will be carried out

• Raise a valid expectation in those affected that the entity will carry out the restructuring by starting to implementing that plan or announcing its main features to those affected by it

Gold-digger Co. has damaged the environment due to its past operations. At the end of the operating period, legislation is passed requiring Gold-digger Co. to repair the damage. The amount is uncertain because Gold-digger Co. does not know how much the restoration will cost. Should Gold-dgger Co. recognize a provision?

• Yes. The legislation was passed at the end of the reporting period, so a past event has occurred

• Yes. The damage occurred in the past, and there is a present obligation to repair the damage

• No. The legislation creates a constructive obligation (not a legal obligation)

• No. Exactly how muh the restoration will cost is unknown

Soundtrack Co. sells goods with warranty. Its customers are covered for repair costs associated with manufacturing defects that occur within the first 6 months. In this financial year, it is estimated that if:

• - Minor defects were detected in all products sold, repair costs would be $1 milliom

• - Major defects were detected in all products sold, repair cost would be $4 million

• Soundtrack Co.'s experience and future expectations indicate that for this financial year:

• - 75% of the goods sold will have no defects;

• - 20% of the goods sold will have minor defects, and

• - 5% of the goods sold will have major defect.

What is the expected value of the cost of repairs?

• $ 400,000

  = $ 1mil x 20% + $ 4m x 5%

• $ 850,000

  = $ 4 mil x 20% + $ 1mil x 5%

• $ 1mil

• $ 4mil

Qunos Ltd. has a high probability of losing a lawsuit in which it is the defendant. The case is now in the final stage, and a ruling is expected within a week. Qunos Ltd. has already recognized the provision regarding this lawsuit. It is virtually certain that Qunos Ltd.'s insurance will cover any loss incurred.

Can Qunos Ltd. recognize the amounts to be received under the insurance policy as an asset and if so, can the asset be against the provision?

• The asset cannot be recognized but the amount is offset against the provision

• The asset cannot be recognized and the amount cannot be offset

• The asset can be recognized and offset against the provision

• The asset can be recognized but cannot offset against the provision

Prets Co. has some customers who failed to pay their bills where payment is required in periodic instalments over an extended period. As the up-front payment is set to cover the costs, the overall sale is still profitable. Can Prets Co. recognize a provision under IAS 37 against some of the doubtful debts?

• Yes. A provision under IAS 37 cover adjustments to the carrying amounts of assets

• Yes. A provision under IAS 37 includes liabilities and assets of uncertain timing or amount

• No. No provision should be recognized for instalment sales which are profitable but at a reduced margin

• No. There is only a possible reduction to the inflow of economic benefits, rather than an outflow of economic benefits

Kicco Co.'s major supplier takes out a long-term loan from a bank. Kicco Co. provides a guarantee because the suppliers agrees to provide the output Kicco Co. requires.

How should Kocco Co. account for the guarantee?

• Recognize a provision and make necessary disclosures

• Recognize a contingent liabilities unless the possibility of a transfer of benefits is remote

• Disclose a contingent liabilities unless the possibility of a transfer of benefits is remote

• Do nothing until the supplier show any signs of severe financial difficulties

Which of the following statements is true?

• A contingent liability is always disclosed, even if the possibility of an outflow is remote

• A contingent asset can only be recognized if the inflow of economic benefits is virtually certain

• Future operating losses meet the definition of a liability if they can be measured reliably

• A provision of $10,000 should be recognized when there is a 90% chance of paying $5,000 or a 10% chance of paying $10,000

Which of the following statements is true?

• An entity that takes out insurance against a liability must offset against the liability

• A reimbursement should be recognized only when it is virtually certain that it will be received if the entity settles the obligation

• In the statement of profit or loss and other comprehensive income, the expense relating to a provision may never be presented net of the amount recognized for a reimbursement

• An entity enters into a property lease for 10 years. The entity's management predicts that the entity will be making losses for the first 5 years, but the overall lease contract is estimated to be profitable. This meets the definition of an onerous contract