Question

International Accounting:

Answer based on IFRS unless otherwise indicated.

What is a provision, and when must a provision be recognized?

What is a contingent liability? What is the financial reporting treatment for contingent liabilities?

What is a constructive obligation?

What is an onerous contract? How are onerous contracts accounted for?

How does a company measure the net pension benefit liability (asset) to report on the balance sheet under IFRS and U.S. GAAP?

page 198In accounting for post-employment benefits, when are past service costs and actuarial gains and losses recognized in income?

What is the basis for determining compensation cost in an equity-settled share-based payment transaction with nonemployees? With employees?

Answer 1

A) A provision can be a liability of uncertain timing or amount. A liability, in turn, is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.^[1]

Though it is often thought to be, a provision should not be considered to be a form of savings. Examples are; income tax liability, product warranty, environment restoration,etc...,

B)

Contingent liability:

• a possible obligation depending on whether some uncertain future event occurs, or
• a present obligation but payment is not probable or the amount cannot be measured reliably

C) A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period.

D) According to the standard, a contract is onerous at initial recognition if the expected cash outflows plus the risk adjustment and any previously recognized acquisition cash flows exceed the expected cash inflows. In other words, the insurance contract is onerous if fulfillment cash flows plus pre-coverage cash flows are a net outflow. In contrast to an expected profit, this net outflow needs to be immediately recognized in P&L.