1、F3 Chapter 16 Provisions and ContingenciesProvided byAcademy of Professional Accounting (APA)Professional Accounting EducationCopyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái)ACCA F3Financial Accounting (FA)財(cái)務(wù)會(huì)計(jì)第十六講ACCA Lecturer: Carrie NICopyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 2D9:

2、Provisions and Contingencies? Provisions? Contingent liabilities? Contingent assetsCopyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 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 resul

3、t of past transactions or events.Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 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 probabl

4、e that an outflow of economic resources 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 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 5Provision Accounting tre

5、atmentThe provision represents both a cost to 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

6、 provision:? Dr Provision (SOFP)? Cr Expense (SOPL)Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 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 mil

7、lion whereas if major repairs were required, this would 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 shoul

8、d be made in 20x8 assuming the provision required then is $0.75 million?c) What entry should be made in 20x9 assuming the provision required then is $0.3 million?Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 7Contingent LiabilityIAS 37 defines a contingent liability as the following:? A possi

9、ble obligation that arises from past events and whose existence 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 p

10、robable that an outflow of economic resources will be required to settle the obligation; or? The amount of the obligation cannot be measured with sufficient reliability.Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 8Contingent LiabilityContingent liabilities should be disclosed in the notes u

11、nless probability of an outflow of resources embodying economic benefits 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 reimbursementCop

12、yright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 9Contingent LiabilityLearning exampleCompany 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 default

13、ing on the loan are slim.How should company A account for this guarantee?Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 10Contingent LiabilityDecision TreeCopyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 11Contingent LiabilityLearning exampleSam owns a business selling timber to trade cust

14、omers only. During the year ended 30 June 20x6, a salesman from one of Sams biggest trade customers 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

15、as a result of the accident. The letter stated that if Sam wanted to come to an arrangement out of 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 comi

16、ng to court and Sam losing.Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 12Contingent liabilityLearning 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 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教

17、育平臺(tái) 13Contingent LiabilityLearning exampleThe following items have to be considered in finalising the financial statements 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 compan

18、y has guaranteed the overdraft of another company. The likelihood of a liability arising under the guarantee is assessed 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 n

19、o actionC. Create a provision create a provisionD. Disclose by note only Disclose by note onlyCopyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 714Contingent LiabilityIAS 37 defines a contingent assets as a possible asset that arises from past events and whose existence will be confirmed only by

20、the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.Contingent 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 benefi

21、ts is virtually certain then the asset is not a contingent asset and should be recognised in the financial statements.Copyright ? ACCAACCAspace 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 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 中國(guó)ACCA特許公認(rèn)會(huì)計(jì)師教育平臺(tái) 16SummaryRemember the rul