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

Advanced financial accounting - Lecture 28: Events after balance-sheet IAS-10, provisions, contingent liabilities and assets IAS-37. The main topics covered in this chapter include: IAS-37 - provision, contingent liabilities and contingent assets; provision for doubtful debts; provision for depreciation;... Please refer to the lecture for details!

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 Provision for doubtful debts Provision for depreciation Increase in liabilities 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 .. .IAS-37 Provision, Contingent liabilities & Contingent Assets Provisions Reduction in assets Provision for doubtful debts Provision for depreciation Increase in liabilities Future... 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... Provision is a liability of uncertain timing and events Three Stages of Liabilities • Certain liabilities • Virtually certain liabilities • Uncertain liabilities Trade payables Accrued expenses