Provision is an existing liability of ubncertain timing or uncertain amount. a.

. The entity has a present obligation, legal or constructive, as a result of a past event b. It is probable that an outflow of resources embodying economic benefits would be required to settle an obligation c. The amount of the obligation can be measured reliably Legal Obligation arises from a contract or other operation of law Constructive Obligation the entity has indicated to other parties that it will accept certain responsibilities. The entity has created a valid expectation on the part of other parties that it will discharge those responsibilities

Obligating Event past event that leads to a present obligation Measurement of a provision a. Best estimate b. Range of possibilities MIDPOINT is used c. Large population expected value (weighing all possible outcomes) Other Measurement Considerations: 1. 2. 3. 4. 5. 6. 7. 8. 9. Risks and uncertainties PV of obligation provision shall be discounted if effect is material Future events new legislation and changes in technology Expected disposal of Assets gains from expected disposal of assets is NOT INCLUDED in measuring a provision Reimbursement recognized when virtually certain - Treated as a separate asset and shall not exceed the amount of the provision Changes in Provision Use of Provision Future Operating Losses provision shall not be recognized because of this. Onerous Contract present obligation under the contract shall be measured and recognized.

Examples of provision: 1. 2. 3. 4. Warranties Environmental contamination Decommissioning or abandonment costs Court case

Quick notes of PROVISION and CONTINGENT LIABILITY Reference: Financial Accounting -2 by Conrado T. Valix and Christian Valix

5. Guarantee Restructuring a program that is planned and controlled by management and materially changes either the scope of a business of an entity or the manner in which that business is a conduct. Examples: a. b. c. d. Sale or termination of line of business Closure of business in a location/relocation Change in management structure Reorganization of an entity that has a material and significant impact on operations

Constructive Obligations for restructuring arises when these two conditions are present: 1. The entity has a detailed formal plan 2. The entity has raised VALID EXPECTATION that it will continue its restructuring by implementing and announcing it to those affected. *Restructuring provision shall ONLY include DIRECT EXPENDITURES. Excludes: a. cost of restraining or relocating continuing staff b. marketing or advertising program c. investment in new system and distribution networks. Contingent Liability possible obligation that arises from past event and whose existence arises from past event and whose existence will only be confirmed by occurrence/non-occurrence of one or more uncertain events. Subsequent Events events after reporting period. Adjusting Events: 1. 2. 3. 4. 5. 6. Resolution after reporting period of a court case Bankruptcy of a customer Sale of inventory Determination of the cost of assets Determination of the profit sharing or bonus payment Discovery of fraud or errors

Non-adjusting Events (disclosure only): 1. 2. 3. 4. Business combination Plan to discontinue an operation Major purchase and disposal of asset or expropriation of major asset by government Destruction of a major production plant by fire

Quick notes of PROVISION and CONTINGENT LIABILITY Reference: Financial Accounting -2 by Conrado T. Valix and Christian Valix

5. Major and potential OS transactions 6. Abnormally large changes after the reporting period in asset prices/FOREX rates

Quick notes of PROVISION and CONTINGENT LIABILITY Reference: Financial Accounting -2 by Conrado T. Valix and Christian Valix