Advanced financial accounting - Lecture 28: Events after balance-sheet IAS-10, provisions, contingent liabilities and assets IAS-37

Advanced Financial
Accounting
FIN-611
Mian Ahmad Farhan
Lecture-28
Events after Balance-sheet IAS-10
Provisions, Contingent Liabilities & Assets IAS-37


IAS-37
Provision, Contingent liabilities & Contingent Assets


Provisions
Reduction in assets
1.
2.

Provision for doubtful debts
Provision for depreciation

Increase in liabilities
1.

Future Losses


Provision
Provision is a liability of uncertain timing and
events

Three Stages of Liabilities
• Certain liabilities
• Virtually certain liabilities
• Uncertain liabilities


Trade
payables

Accrued
expenses

Provision
for losses

Status
(Present
obligation)

Certain liability

Virtually certain
liability

Uncertain
liability

Resulting from
(Past events)

Certain liability

Virtually certain
liability

Uncertain
liability

Outflow of
economic
benefit
(Probable)

Certain liability

Virtually certain
liability

Uncertain
liability

Amount

Certain amount

Virtually certain
liability

Uncertain

liability

Timing

Certain amount

Virtually certain
liability

Uncertain
liability


Journal Entries
Trade payable
Purchases A/c
Trade payable

xxx

Accrued expense
Expenses
xxx
Accrued Expenses
Provision
Expenses
xxx
Provision of losses
Against services
Repair

xxx
Accounts payable

xxx

xxx

xxx

xxx


Obligating Events
Obligating event is an event that creates a legal or
constructive obligation that results in an entity having no
realistic alternative to settling that obligation.


Legal Obligation
Legal obligation is an obligation that derives
from a contract, legislation or other
operation of law.


Constructive Obligation
Constructive obligation is an obligation that derives from an
entities action whereby an establish pattern of past
practice, publish policies or sufficiently specifics amount
statement the entity has indicating other parties that it will
expects certain responsibilities and as a result the entity

has created a valid expectation on the part of other
parties that it will discharge those responsibilities.


Journal Entry
Losses against warranty claim 1,000,000
Prevision against warranty
1,000,000
Warranty claim expense
Cash

1,200,000
1,200,000

Prevision against warranty
1,000,000
Warranty claim expense
1,000,000


Warranty expense
Cash

1,200,000

Provision against
warranty claim

1,000,000

Balance
1,200,000

200,000

1,200,000

Provision against warranty
Balance b/d

1,000,000 Balance b/f

1,000,000
1,000,000

1,000,000


Journal Entry
Losses against warranty claim 1,000,000
Prevision against warranty
1,000,000
Warranty claim expense
Cash

1,200,000
1,200,000

Prevision against warranty
1,000,000

Warranty claim expense
1,000,000


Journal Entry
Losses against warranty claim 1,000,000
Prevision against warranty
1,000,000
Warranty claim expense
Cash

1,200,000
1,200,000

Prevision against warranty
1,000,000
Warranty claim expense
1,000,000


Prevision against warranty
300,000
Losses against warranty claim
300,000


Contingent liability
A contingent liability is a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly with in the
enterprise's control.

OR
A Present obligation that arises from past event but is not recognized because
a). It is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.
b). The amount of the obligation can not be measured with sufficient reliability.


Stages

Liabilities

Assets

Certain

Recognize
Expense A/c xxx
Liability A/c xxx

Recognize
Receivable assets A/c xxx
Income A/c
xxx

Virtually
certain
(Accruals)

Recognize

Expense A/c xxx
Accrued liability A/c xxx

Recognize
Accrued income A/c xxx
Income A/c
xxx

Provision
(Uncertain)

Recognize
Expense A/c xxx
Provision A/c xxx

Disclosure only

Contingenci
es

Disclosure only

No disclosure

Remote
obligations

No disclosure

No disclosure

Liability

Present
obligation
Arising
from past
events
Probable
outflow of
economic
benefit in
future

Creditors

Accrued
expenses

Provision
liability

Contingen
t
liability

Contingen
t
liability

Contingen
t
liability

Certain

Virtually
certain

Uncertain

Uncertain

Uncertain

Uncertain

X



























X



Reliable
estimation
of value
As per
Invoice





X

-

Probable
outflow
Reliable
Estimation
—Treat
contingent
liability in
both cases
Disclosure
required
---Remote


Trade payables Accrued
expenses

Provision for
losses

Certain liability

Virtually certain
liability

Uncertain liability

Status

Present obligation

Present obligation

Present obligation

Resulting from

Past event

Past event

Past event

Outflow of
economic
benefit

Probable

Probable

Probable

Amount

Certain amount

Virtually certain

Uncertain

Timing

Certain

Virtually certain

Uncertain liability


Case-1

Case-2

Case-3

Status

Possible
obligation

Present obligation

Present obligation

Resulting from

Past event

Past event

Past event

Outflow of
economic
benefit

Will be confirmed
upon the
happening or not
happening of
future events, not
in the control of
entity

Probable

Not probable

Amount

A- Future events
are not remote
B- Future events
are remote

Cannot measure
reliably

A- Probability are
not remote
B- Probability are
remote

Timing

Uncertain

Uncertain

Uncertain