Provisions, Contingent Liabilities, Contingent Assets, and Events After the Reporting Period

Vocabulary practice flashcards covering IAS 37 (Provisions, Contingent Liabilities, Contingent Assets) and IAS 10 (Events After the Reporting Period).

Provision (IAS 37)

A liability of uncertain timing or amount, recognized when there is a present obligation from a past event, a probable outflow of economic resources, and a reliable estimate.

Probable (IAS 37)

Defined under IAS 37 as "more likely than not," meaning there is a greater than $50\%$ chance that an event or outflow of resources will occur.

Obligating Event

A past event that creates a present legal or constructive obligation because the entity has no realistic alternative but to settle the obligation.

Legal Obligation

An obligation that derives from a contract, legislation, or another operation of law, requiring the entity by law to settle it.

Constructive Obligation

An obligation arising from an entity's actions where past practice, published policies, or specific statements create a valid expectation among third parties that it will discharge certain responsibilities.

Best Estimate

The amount that an entity would reasonably expect to pay to settle or transfer an obligation at the end of the reporting period.

Discounting of Provisions

The process of reducing estimated future cash outflows to their present value when the effect of the time value of money is material.

Unwinding of the Discount

The periodic increase in the carrying amount of a discounted provision due to the passage of time, recognized as an interest expense in the financing category of profit or loss.

Warranty Provision (IAS 37)

A provision recognized for the probable cost of repairing or replacing defective goods when a manufacturer's warranty is included in the selling price at no additional cost.

Extended Warranty (IFRS 15)

A warranty sold separately from the product that represents a separate performance obligation, accounted for under IFRS 15 rather than IAS 37.

Decommissioning Costs

Obligations arising at the end of an asset's useful life to dismantle, remove an asset, or restore a site; their present value is recognized as a provision and capitalized as part of the asset's cost.

Future Operating Losses

Anticipated future losses from normal business operations for which provisions are explicitly prohibited under IAS 37 because they do not meet the definition of a liability.

Onerous Contract

A contract in which the unavoidable costs of meeting the contractual obligations exceed the economic benefits expected to be received from it.

Measurement of an Onerous Contract Provision

Measured at the lower of the cost of fulfilling the contract and any penalties or compensation arising from failure to fulfill (cancelling) the contract.

Incremental Costs of Fulfilling a Contract

Costs that arise solely because a contract exists and are included in the cost of fulfillment, such as direct labor and direct materials.

Restructuring

A programme planned and controlled by management that materially changes either the scope of a business undertaken by an entity or the manner in which the business is conducted.

Constructive Obligation to Restructure

Arises only when an entity has a detailed formal plan and creates a valid expectation among affected parties by starting implementation or announcing its main features.

Restructuring Expenses

Direct expenditures that are necessarily entailed by the restructuring and are not associated with the ongoing activities of the entity.

Excluded Restructuring Costs

Expenditures relating to future business activities—such as retraining or relocating continuing staff, marketing, and investment in new systems—that must not be included in a restructuring provision.

Contingent Liability

A possible obligation from past events confirmed only by uncertain future events not wholly in entity control, or a present obligation not recognized because an outflow is not probable or cannot be reliably measured.

Contingent Asset

A possible asset arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the entity's control; disclosed when inflow is probable.

Virtual Certainty (IAS 37)

The threshold where the realization of economic benefits is no longer in doubt, requiring a contingent asset to cease being contingent and be formally recognized as an asset in the financial statements.

Let Out Clause (IAS 37)

An extremely rare exemption permitting an entity to omit detailed disclosures that would seriously prejudice its position in a dispute, provided the general nature and reason are disclosed.

Events After the Reporting Period (IAS 10)

Favourable and unfavourable events occurring between the end of the reporting period and the date when the financial statements are authorised for issue.

Adjusting vs. Non-Adjusting Events

Adjusting events provide evidence of conditions that existed at the reporting date and require financial statement adjustments; non-adjusting events indicate conditions that arose after the reporting date and require disclosure only if material.