Note: This example deals with a single guarantee. A provision should be recognised for that present obligation if the other recognition criteria described above are met. Conclusion — A provision is recognized for the best estimate of the amount to settle the obligation. There are some differences in disclosure and recognition of contingent assets and liabilities:- Contingent assets are not required to be disclosed but contingent liabilities are required to be disclosed. Past Event: A Past event that leads to a present obligation is called an obligating event. If there is no reasonable certainty for outflow exists, provision should be reversed.
It should be disclosed in financial statements unless the possibility of outflow is remote. Legal proceedings have been started but the liability is in disputes yet. When the realization of gain is certain then it does not remain a contingent asset but becomes an actual asset and is recognized and disclosed in the financial statements. Present obligation as a result of a past obligating event- There is no present obligation. During 2005-06, the financial condition of Enterprise B deteriorates and at 30 September 2005 Enterprise B goes into liquidation. Provisions are measured at the best estimate including risks and uncertainties of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material.
Where details of a proposed new law have yet to be finalized, an obligation arises only when the legislation is virtually certain to be enacted. Legal proceedings are started seeking damages from the enterprise but it disputes liability. No provisioning is required unless the virtual certainty of the enactment of the law is established. It is disclosed on the liabilities side of balance sheet. Conclusion — No provision is recognized.
Reimbursement for expenditure of which provision is created, should be recognized when and only when it is virtually certain that the reimbursement shall be received on settlement of liability. Restructuring may include the following: a sale or termination of a line of business; b the closure of business location in a region c eliminating a layer of management; Treatment: A provision for recognition criteria is recognized only when the recognition criteria for provision is met. This Appendix addresses neither new waste nor historical waste from sources other than private households. When a provision liability is recognised, the debit entry for a provision is not always an expense. Contingent Asset It is a possible asset which arises from past event whose existence depends upon the occurrence or non-occurrence of some uncertain future events which are not in the control of the entity. An outflow of resources embodying economic benefits in settlement - Assessment of probability of incurring fines and fines and penalties by non-compliant operation depends on the details of the legislation and the stringency of the enforcement regime. Example 3: Offshore Oilfield An enterprise operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed.
In extremely rare cases, disclosures can be expected to seriously harm the enterprise in a dispute with other parties. However, even in such a case, the entity considers other possible outcomes. Sometimes the provision may form part of the cost of the asset. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period. Measurement The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
Risks and uncertainties The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision. Upon estimating the dollar amount to report using , the lowest estimated asset valuation must be utilized under this principle. However, disclosure is not required if payment is remote. Either winning or losing the lawsuit is not known at present thus the occurrence of the payment is not guaranteed. Some examples of provisions Circumstance Recognise a provision? This practice is done to ensure that the year-end financial statements are presented in a realistic manner where assets are not overvalued and liabilities are not undervalued.
Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. Treatment : A provision should be recognized when: a An enterprise has a present obligation as a result of past event b It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and c A reliable estimate can be made of the amount of the obligation. Liability It is a present obligation which arises from past obligating event and the settlement of which requires the outflow of economic resources of the entity. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote. However, upon meeting certain conditions, contingent assets are reported in the in the accompanying notes.
The inflow of economic benefits is certain. A provision is a decrease in asset value and should be recognized when a present obligation arises due to a past event. An entity does not have a constructive obligation to pay a levy that will be triggered by operating in a future period as a result of the entity being economically compelled to continue to operate in that future period. Objective This standard provides appropriate recognition and measurement guide lines which are applicable for the accounting treatment of provision, contingent liability and contingent asset along with related disclosure requirements for such items. A provision should be used only for expenditures for which the provision was originally recognized.
Contingent asset is a possible asset which arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of the company. The matter is disclosed as a contingent liability unless the probability of any outflow is regarded as remote b At 31 March 2006 Present obligation as a result of a past obligating event — On the basis of the evidence available, there is a present obligation. If there is no reasonable certainty for inflow exists, Assets and related income should be reversed. Onerous Contract It is a contract whose unavoidable cost of performance exceeds its revenue. Under the warranty terms all the customers are covered for the cost of repair for any mechanical faults which arise in the first year of purchase. The outflow of economic benefits is certain.