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Accounting and Management

In: Business and Management

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* Existing liability

* Uncertain timing or amount on future expenditure. (ito ang nagdidistuinguish)

* Liability still exist but the date due and amount is indefinite

* May equal to estimated liability or loss contingency (accrued because it is both probable and measurable)

Provision and other liabilities

* P; uncertain OL; certainty of timing and amount

Recognition of provision

* P shall be recognized in the FS under the ff. conditions

A. Present Obligation (legal or construtive) from past event

LO: arise from contract, legislation or other operation of law

CO: dervide from an entity’s action. When entity from established pattern of practice or stated policy has created a valid expectation that will accept certain responsibility.

Obligating event, Past event that leads to Present Obligation

Provision CANNOT be created in anticipation of future event.

B. Outflow of resources req. to settle the obligation, must be probable.

The probablity of this event must be greater than the probability of this not to occur.

C. Amount of the obligation, measured realiably.

Estimates is essential in preparation of FS

True in the case of provision, since it is more uncertain than other items in the FS.

Standard suggest that by using range of possible outcomes, the entity is able to make an estimate (suffieciently relaible)

No reliable estimate, no liablity

Measurement of provision

* Amount of the provision should be the best estimate of the expenditure to settle the present obligation at the end of the RP

* Single obligation being measured, the individual most likely outcome adjusted for the effect of other possible outcomes may be the best estimate.

* Continuous range of possible outcomes, and eachpoint is likely as the others, the MIDPOINT of the range is used.

* Large population of items, it is estimated by WEIGHTING all possible outcomes by their associated possibilities, EXPECTED VALUE.

Other measurement considerations

* A. Risk and uncertainties

This shall be taken into account in reaching the best estimate of a provision.

Risk describes variability of outcome

Risk adjustment may increase the amount at which a liability is measured.

Prudence is cautious om uncertainty so that income and assets do not overstate. HOWEVER uncertainty does not justify excessive provision or overstated liabilities

* B. Present value of obligation

As effect of time value of money
Provision = PV of expenditure expected to settle the obligation
Discounted, if MATERIAL
NOT discounted, if IMMATERIAL

The discount rate = pretax, reflects the current market assessment of time value of money and risk specific to liability.

Discount rate, should NOT reflect the risk for which cash flow estimate already adjusted.

* C. Future events

where there is sufficient evidence that it will occur and affect the amount required to settle an obligation, it shall be reflected in the amount of provision.

* D. Expected disposal of assets

* E. Reimbursements

* F. Changes in Provisions

* H. Use of Provision

* I. Future operating losses

* J. Onerous contract…...

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