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!
Trang 1Advanced Financial
Accounting FIN-611
Mian Ahmad Farhan
Lecture-28 Events after Balance-sheet IAS-10 Provisions, Contingent Liabilities & Assets IAS-37
Trang 2Provision, Contingent liabilities & Contingent Assets
Trang 3Provisions
Reduction in assets
1 Provision for doubtful debts
2 Provision for depreciation
Increase in liabilities
1 Future Losses
Trang 4Provision Provision is a liability of uncertain timing and events
Trang 5Three Stages of Liabilities
• Certain liabilities
• Virtually certain liabilities
• Uncertain liabilities
Trang 6Trade 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
Trang 7Journal Entries
Trade payable
Accrued expense
Accrued Expenses xxx
Provision
Provision of losses xxx Against services
Accounts payable xxx
Trang 8Obligating 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
Trang 9Legal Obligation
Legal obligation is an obligation that derives from a contract, legislation or other
operation of law
Trang 10Constructive 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
Trang 11Journal Entry
Losses against warranty claim 1,000,000
Prevision against warranty 1,000,000
Warranty claim expense 1,200,000
Prevision against warranty 1,000,000
Warranty claim expense 1,000,000
Trang 12Warranty expense
Cash 1,200,000
1,200,000
Provision against warranty claim 1,000,000
1,200,000
Provision against warranty
Balance b/d 1,000,000
1,000,000
Balance b/f 1,000,000
1,000,000
Trang 13Journal Entry
Losses against warranty claim 1,000,000
Prevision against warranty 1,000,000
Warranty claim expense 1,200,000
Prevision against warranty 1,000,000
Warranty claim expense 1,000,000
Trang 14Journal Entry
Losses against warranty claim 1,000,000
Prevision against warranty 1,000,000
Warranty claim expense 1,200,000
Prevision against warranty 1,000,000
Warranty claim expense 1,000,000
Trang 15Prevision against warranty 300,000
Losses against warranty claim 300,000
Trang 16Contingent liability
A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or
non-occurrence 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
Trang 17Stages 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 Disclosure only No disclosure
Trang 18Liability Creditors Accrued
expenses
Provision liability
Contingen t
liability
Contingen t
liability
Contingen t
liability
Certain Virtually
certain Uncertain Uncertain Uncertain Uncertain Present
obligation X
Arising
from past
events
Probable
outflow of
economic
benefit in
future
Reliable
estimation
of value
As per Invoice X
-Probable outflow Reliable Estimation
—Treat contingent liability in both cases
Disclosure required -Remote
Accounting
treatment
Expense/Re source A/c
Payable A/C
Expense A/C
Accrual A/C
Losses against warranty Dr
Provision for
warranty
No Entry only disclosure
is required
No Entry only disclosure
is required
No Entry only disclosure
is required
Trang 19Trade payables Accrued
expenses Provision for losses
Status
Certain liability Virtually certain
liability Uncertain liability Present obligation Present obligation Present obligation
Resulting from Past event Past event Past event
Outflow of
economic
benefit
Amount Certain amount Virtually certain Uncertain
Trang 20Case-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
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
Accounting
Treatment
A- Disclosed in notes
B- Not Disclosed
in notes
Disclosed in notes A- Disclosed in
notes B- Not Disclosed
in notes