Financial Accounting II: Provisions, Contingent Liabilities, and Contingent Assets

Flashcards covering key concepts related to provisions, contingent liabilities, and contingent assets in financial accounting.

What is the objective of IAS 37?

To ensure the appropriate recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets.

When should a provision be recognized according to IAS 37?

When there is a present obligation as a result of a past event, it is probable that an outflow of resources will occur, and the amount can be reliably estimated.

What is a provision?

A liability of uncertain timing or amount.

What differentiates a provision from a contingent liability?

A provision is recognized as a liability, while a contingent liability is disclosed unless the possibility of an outflow of resources is remote.

What factors must be considered to recognize a provision for restructuring?

A detailed formal plan must be in place, and there should be a valid expectation raised in those affected.

How do you recognize a reimbursement for a provision?

Only when it is virtually certain that the reimbursement will be received when the entity settles the obligation.

If an expected obligation arises from past events but cannot be reliably estimated, what is it classified as?

A contingent liability.

What is an onerous contract?

A contract in which the unavoidable costs of meeting the obligations exceed the expected economic benefits.

What type of cash flow activity is related to the settlement of provisions?

Operating activity.

What is the accounting treatment if the outflow of economic benefits is not probable?

The amount cannot be recognized as a provision but must be disclosed as a contingent liability.