Acct 496 CH 5
Acct 496 CH5 Assignment
Kangkang Guo
Q1. What is a provision, and when must a provision be recognized?
Provision provides guidance for reporting liabilities of uncertain timing, amount, or existence. A provision should be recognized when:
1). The entity has a present obligation (legal or constructive) as a result of a past event.
2). It is probable (more likely than not) that an outflow of resources embodying economic events will be required to settle the obligation.
3). A reliable estimate of the obligation can be made.
Q2.What is a contingent liability? What is the financial reporting treatment for contingent liabilities?
Contingent liabilities are defined in IAS 37 as one of the following:
• Possible obligations that arise from past events and whose existence will be con- firmed by the occurrence or nonoccurrence of a future event.
• A present obligation that is not recognized because (1) it is not probable that an outflow of resources will be required to settle the obligation or (2) the amount of the obligation cannot be measured with sufficient reliability.
Contingent liabilities are disclosed unless the possibility of an outflow of resources embodying the economic future benefits is remote.
Q3. What is a constructive obligation?
A constructive obligation exists when a company through past actions or current statements indicates that it will accept certain responsibilities and, as a result, has created a valid expectation on the part of other parties that it will discharge those responsibilities.
Q4. What is an onerous contract? How are onerous contracts accounted for?
An onerous contract is a contract in which the unavoidable costs of meeting the obligation of the contract exceed the economic benefits expected to be received from it. When an onerous contract exists, a provision should be recognized for the unavoidable costs of the contract, which is the lower of the cost of fulfillment and the penalty that would result from non-fulfillment under the
Kangkang Guo
Q1. What is a provision, and when must a provision be recognized?
Provision provides guidance for reporting liabilities of uncertain timing, amount, or existence. A provision should be recognized when:
1). The entity has a present obligation (legal or constructive) as a result of a past event.
2). It is probable (more likely than not) that an outflow of resources embodying economic events will be required to settle the obligation.
3). A reliable estimate of the obligation can be made.
Q2.What is a contingent liability? What is the financial reporting treatment for contingent liabilities?
Contingent liabilities are defined in IAS 37 as one of the following:
• Possible obligations that arise from past events and whose existence will be con- firmed by the occurrence or nonoccurrence of a future event.
• A present obligation that is not recognized because (1) it is not probable that an outflow of resources will be required to settle the obligation or (2) the amount of the obligation cannot be measured with sufficient reliability.
Contingent liabilities are disclosed unless the possibility of an outflow of resources embodying the economic future benefits is remote.
Q3. What is a constructive obligation?
A constructive obligation exists when a company through past actions or current statements indicates that it will accept certain responsibilities and, as a result, has created a valid expectation on the part of other parties that it will discharge those responsibilities.
Q4. What is an onerous contract? How are onerous contracts accounted for?
An onerous contract is a contract in which the unavoidable costs of meeting the obligation of the contract exceed the economic benefits expected to be received from it. When an onerous contract exists, a provision should be recognized for the unavoidable costs of the contract, which is the lower of the cost of fulfillment and the penalty that would result from non-fulfillment under the