Professional Documents
Culture Documents
LIABILITY
LIABILITY
2.
3.
4.
a. When there is a legal obligation arising from a past (obligating) event, the probability of
b. the outflow of resources is more than remote (but less than probable), and a reliable estimate can
be made of the amount of the obligation.
c. When there is a constructive obligation as a result of a past (obligating) event, the outflow of
resources is probable, and a reliable estimate can be made of the amount of the obligation.
d. When there is a possible obligation arising from a past event, the outflow of resources is probable,
and an approximate amount can be set aside toward the obligation.
e. When management decides that it is essential that a provision be made for unforeseen
circumstances and keeping in mind this year the profits were enough but next year there may be losses.
6. Amazon Inc. has been served a legal notice on December 15, 20X1, by the local environmental
protection agency (EPA) to fit smoke detectors in its factory on or before June 30, 20X2 (before
June 30 of the following year). The cost of fitting smoke detectors in its factory is estimated at
$250,000. How should Amazon Inc. treat this in its financial statements for the year ended
December 31, 20X1? *
a. Recognize a provision for $250,000 in the financial statements for the year ended December31,
20X1.
b. Recognize a provision for $125,000 in the financial statements for the year ended December31,
20X1, because the other 50% of the estimated amount will be recognized next year in the financial
statement for the year ended December 31, 20X2.
c. Because Amazon Inc. can avoid the future expenditure by changing the method of operations and
thus there is no present obligation for the future expenditure, no provision is required at December 31,
20X1, but as there is a possible obligation, this warrants disclosure in footnotes to the financial statements
for the year ended December 31,20X1.
d. Ignore this for the purposes of the financial statements for the year ended December 31,20X1, and
neither disclose nor provide the estimated amount of $250,000.
7. A competitor has sued an entity for unauthorized use of its patented technology. The amount that
the entity may be required to pay to the competitor if the competitor succeeds in the lawsuit is
determinable with reliability, and according to the legal counsel it is less than probable (but more
than remote) that an outflow of the resources would be needed to meet the obligation. The entity
that was sued should at year end: *
a. Recognize a provision for this possible obligation.
b. Make a disclosure of the possible obligation in footnotes to the financial statements.
c. Make no provision or disclosure and wait until the lawsuit is finally decided and then expense the
amount paid on settlement, if any.
d. Set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the
possible liability.
8. A factory owned by XYZ Inc. was destroyed by fire. XYZ Inc. lodged an insurance claim for the
value of the factory building, plant, and an amount equal to one year’s net profit. During the year,
there were a number of meetings with the representatives of the insurance company. Finally, before
year-end, it was decided that XYZ Inc. would receive compensation for 90% of its claim. XYZ Inc.
received a letter that the settlement check for that amount had been mailed, but it was not received
before year-end. How should XYZ Inc. treat this in its financial statements? *
a. Disclose the contingent asset in the footnotes.
b. Wait until next year when the settlement check is actually received and not recognize or disclose
this receivable at all since at year-end it is a contingent asset.
c.. Because the settlement of the claim was conveyed by a letter from the insurance company that
also stated that the settlement check was in the mail for 90% of the claim, record 90% of the claim as a
receivable as it is virtually certain that the contingent asset will be received.
d. Because the settlement of the claim was conveyed by a letter from the insurance company that
also stated that the settlement check was in the mail for 90% of the claim,record 100% of the claim as a
receivable at year-end as it is virtually certain that the contingent asset will be received, and adjust the
10% next year when the settlement check is actually received.
9. The board of directors of ABC Inc. decided on December 15, 20XX, to wind up international
operations in the Far East and move them to Australia. The decision was based on a detailed formal
plan of restructuring as required by IAS 37. This decision was conveyed to all workers and
management personnel at the headquarters in Europe. The cost of restructuring the operations in
the Far East as per this detailed plan was $2 million. How should ABC Inc. treat this restructuring
in its financial statements for the year-end December 31, 20XX? *
a. Because ABC Inc. has not announced the restructuring to those affected by the decision and thus
has not raised an expectation thatABC Inc. will actually carry out the restructuring (and as no constructive
obligation has arisen), only disclose the restructuring decision and the cost of restructuring of $2 million
in footnotes to the financial statements.
b. Recognize a provision for restructuring since the board of directors has approved it and it has been
announced in the headquarters of ABC Inc. in Europe.
c. Mention the decision to restructure and the cost involved in the chairman’s statement in the annual
report since it a decision of the board of directors.
d. Because the restructuring has not commenced before year-end, based on prudence, wait until next
year and do nothing in this year’s financial statements.
10. A provision is a liability….
11. An entity may recognise a present obligation under an onerous contract as a provision.
12. Podge Limited created a provision for $100,000 against a certain event which never materialised.
During the financial year, another event costing $80,000 occurred.
May Podge Limited use part of the $100,00 provision against the new event?
13. A contingent asset is one where ______ obligation will arise from past events, which will be
confirmed by events in the future.
14. Under IAS 37 a ‘probable transfer of resources’ when referring to a provision means…
16. When a restructuring involves the sale of an operation, at what point may an obligation arise under
IAS 37?
17. When another party will reimburse some or all of the expenditure required to settle a provision, the
reimbursement should be recognised…
18. Which of the following is a restructuring cost under IAS 37?
19. The amount of a provision shall be the _________ of the expenditures expected to be required to
settle the obligation.
21. Which of the following does not create a constructive obligation under IAS 37?
22. Gains from the expected disposal of assets may be taken into account when measuring a provision.
23. Provisions are reported as part of trade and other payables in the financial statements.
24. The cost of major overhauls of assets such as ships may be provisioned over a number of years prior
to the overhaul.
25. Contingent assets should be recognised in the financial statements when they are…
26. When another party will reimburse some or all of the expenditure required to settle a provision, the
reimbursement should only be recognised when its receipt is…
27. If an entity has a warranty obligation and expects, with more than 50% probability, it will result in
some payments from the entity, a provision should be made for:
28. An entity may avoid disclosure requirements if they expect it would seriously prejudice the position
of the entity in dispute with other parties.
29. An entity may recognise a present obligation under an onerous contract as a provision.
30. Which of the following is not a restructuring cost?