Question

The following events relates to PPD company Ltd.

1. An amount of €35,000 owing to PU ltd for services rendered during May 2019.
2. Long service leave estimated to be €500,000, owing to employees in respect of past services
3. Costs of €26,000 estimated to be incurred for relocating an employee from PPD head office location to another city. The staff member will physically relocate during July 2019.
4. Damages awarded against PPD ltd resulting from a court case decided on 26 June 2019. The judge has announced that the amount of damages will be set at a future date, expected to be in September 2019. PPD has received advice from its lawyers that the amount of the damages could be anything between €20,000 and €7 million.

Requirement.

1. Distinguish between accrual and provision with examples                     2 marks
2. Distinguish between provision and contingent liability with examples.  2 marks
3. Identify whether each of the above transactions (a-d) would be a liability, provision or a contingent liability in June 2019 financial statements 4 marks.

[Total marks 8]

Answer 1

1.

• Accruals are those expenses that have been recorgnised but not paid or any income that have been recognised but not received as on a particular date. eg. Interest Accrued, Service Revenue receivable.
• Provision on the other hand, refers to those amounts that may not be altogether uncertain, but partly ucertain to a extent of incurring outflow of resources from the business in th future. Eg Provision for Bad debts.

2.

• Contingent liability is the condition that there is a probable and not possible chance of outflow of resources from the business in the future, depending upon occurence/non-occurence of any event.
• Provision on the other hand, is condition where there is possible outflow of resource from business. Provisions have more realistic and certain than contingent liability.

3.

1. ACCRUAL => Service already rendered, payment not yet recived.Hence certain and possible.
2. PROVISION=> Computation based on Past event payable in future. Hence Partly uncertain. So a provision.
3. NONE. it is neither a accrual nor a provision as it is a future cost.
4. Contingent Liability=> There is a present obligation but since the amount cannot be measured accurately and reliably, it should be disclosed as a contingent liability.