Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are...

Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are not recognised in the financial statements but disclosed in the notes to financial statements. In essence all provisions are contingent because they are uncertain in timing or amount however there are number of reasons why provisions are recognised in the financial statements but contingent liabilities are not.

Required

Outline the reasons why provisions are recognised in financial statements and the reasons why contingent liabilities are not recognised in the financial statements.

Expert Solution

Provisions are recognised in the financial statements because the following reasons-

A. It is a reliable estimate which can be made of the amount of the obligation so they need to be recorded into the financial statement.

B. Provisions are present obligation which is arise out of a past so they need to be recognised in the financial statement because of the present obligation.

C. Provisions is depicting that there is a high probability that outflow of resources embodying economic benefits will be required to settle the obligation so they need to be recorded.

D.these are specific current statement so entity will have to accept certain responsibilities and other party have valid expectation that entity will discharge is responsibility so these provisions need to be recorded.

Contingent liabilities are not recognised into the financial statement because recording of contingent liabilities may result into recognition of expenses they may never occour so when only occurrence of the liabilities are certain in nature than all the contingent liabilities are to be recorded into the financial statements.contingent liabilities are determined and disclosed in the footnotes to the financial statements.

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