《F3 Chapter 16 Provisions and Contingencies.doc》由会员分享，可在线阅读，更多相关《F3 Chapter 16 Provisions and Contingencies.doc（19页珍藏版）》请在三一文库上搜索。
1、F3 Chapter 16 Provisions and ContingenciesProvided byAcademy of Professional Accounting (APA)Professional Accounting EducationCopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台ACCA F3Financial Accounting (FA)财务会计第十六讲ACCA Lecturer: Carrie NICopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 2D9: Provisions and Con
2、tingencies? Provisions? Contingent liabilities? Contingent assetsCopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 3Provision Definition? A provision is a liability of uncertain timing or amount.? A liability is an obligation of an entity to transfer economic benefits as a result of past transactions or e
3、vents.Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 4Provision RecognitionA provision should only be recognised (i.e., included in the financial statements) when:a) An entity has a present obligation (legal or constructive) as a result of past event;b) It is probable that an outflow of economic resour
4、ces will be required to settle the obligation; andc) A reliable estimate can be made of the amount of the obligation.Unless all three conditions are met, not provision can be recognised.Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 5Provision Accounting treatmentThe provision represents both a cost to
5、 the business and a potential liability:? Dr Expense (SOPL)? Cr Provision (SOFP)The required provision will be reviewed at each year end and increased or decreased as necessary. To increase a provision:? Dr Expense (SOPL)? Cr Provision (SOFP)To decrease a provision:? Dr Provision (SOFP)? Cr Expense
6、(SOPL)Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 6Provision Learning exampleGrass Co. is reviewing its warranty obligations. Based on sales during 20x7 it has established that if all lawnmowers sold required minor repairs, this would cost $1 million whereas if major repairs were required, this woul
7、d cost $6 million.Grass Co. expects that 75% of lawnmowers will have no faults, 20% will need minor repairs and 5% major repairs.Requireda) What provision should be made in 20x7 and what accounting entry is needed to record it?b) What entry should be made in 20x8 assuming the provision required then
8、 is $0.75 million?c) What entry should be made in 20x9 assuming the provision required then is $0.3 million?Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 7Contingent LiabilityIAS 37 defines a contingent liability as the following:? A possible obligation that arises from past events and whose existence
9、 will be confirmed only the occurrence or non-occurrence of one or more uncertain future event not wholly within the control of the entity; or? A present obligation that arises from past events but is not recognised because:? It is not probable that an outflow of economic resources will be required
10、to settle the obligation; or? The amount of the obligation cannot be measured with sufficient reliability.Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 8Contingent LiabilityContingent liabilities should be disclosed in the notes unless probability of an outflow of resources embodying economic benefits
11、 is remote.The required disclosures are:? A brief description of the nature of the contingent liability? An estimate of its financial effect? An indication of the uncertainties that exist? The possibility of any reimbursementCopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 9Contingent LiabilityLearning e
12、xampleCompany A has entered into an agreement to act as guarantor on a bank loan taken out by Mr. Smith. Mr. Smith is a financially secure individual, and the directors are of the opinion that the chances of him defaulting on the loan are slim.How should company A account for this guarantee?Copyrigh
13、t ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 10Contingent LiabilityDecision TreeCopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 11Contingent LiabilityLearning exampleSam owns a business selling timber to trade customers only. During the year ended 30 June 20x6, a salesman from one of Sams biggest trade customers
14、 tripped over some unstuck timber and fell on the warehouse floor. Shortly before the year-end, Sam received a letter from the solicitor of the customer, stating that it was going to take Sam to court as a result of the accident. The letter stated that if Sam wanted to come to an arrangement out of
15、court, the customer was willing to settle for $25,000; otherwise the customer would be claiming $50,000. Sams solicitor has advised him to settle out of court as there is a good change of the case coming to court and Sam losing.Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 12Contingent liabilityLearni
16、ng example contdHow much should Sam include as a provision in the accounts for the year ended 30 June 20x6?A. NilB. $25,000C. $50,000D. $75,000Copyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 13Contingent LiabilityLearning exampleThe following items have to be considered in finalising the financial state
17、ments of Q, a limited liability company:1. The company give warranties on its products. The companys statistics show that about 5% of sales give rise to a warranty claim.2. The company has guaranteed the overdraft of another company. The likelihood of a liability arising under the guarantee is asses
18、sed as possible. What is the correct action to be taken in the financial statements for these items? Item 1 Item 2A. Create a provision disclose by note onlyB. Disclose by note only no actionC. Create a provision create a provisionD. Disclose by note only Disclose by note onlyCopyright ? ACCAACCAspa
19、ce 中国ACCA特许公认会计师教育平台 714Contingent LiabilityIAS 37 defines a contingent assets as a possible asset 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 within the control of the entity.Contingent
20、 assets should be disclosed in the notes where an inflow of economic benefits is probable, otherwise they should be ignored.If the probability of an inflow of economic benefits is virtually certain then the asset is not a contingent asset and should be recognised in the financial statements.Copyrigh
21、t ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 15Contingent AssetsDisclosures for contingent assetsWhere inflow of economic benefits is probable, an entity should disclose:? A brief description of its nature, and where practicable? An estimate of the financial effectCopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台
22、16SummaryRemember the rules using a table:* disclose = explain the nature of contingency and estimates of financial effect in note to the accounts. From year to year, only the change in provision required should be recorded in the income statement.Likelihood of contingency arisingContingent liabilit
23、y = possible expenseContingent asset = possible incomeRemote Ignore IgnorePossible Disclose in accounts * IgnoreProbable Record a provision (assuming other conditions on previous page are met)Dr ExpenseCr ProvisionsDisclose in accounts *Virtually certianRecord an asset andincomeDr AssetCr IncomeCopyright ? ACCAACCAspace 中国ACCA特许公认会计师教育平台 17Summary Provided byAcademy of Professional Accounting (APA)Professional Accounting Education