1. LEONISA GUERRERO TORINO
BSA 2
INTERMEDIATE ACCOUNTING 2
CHAPTER 4 DISCUSSIONS
1. Explain the meaning of a provision.
A provision is an existing liability of uncertain timing or uncertain amount. The essence of a
provision is that there is uncertainty about the timing or amount of the future expenditure. It is this
uncertainty that distinguishes provision from other liabilities. The liability definitely exists at the
end of reporting period but the amount is indefinite or the date when the obligation is due is also
indefinite, and in some cases, the payee cannot be identified or determined. Actually, a provision
may be the equivalent of an estimated liability or a loss contingency that is accrued because it is
both probable and measurable.
2. What are the three conditions necessary for the recognition a provision as a liability?
PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the
financial statements under the following conditions:
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 the obligation.
c. The amount of the obligation can be measured reliably.
3. What is a legal obligation?
A legal obligation is an obligation arising from a contract, legislation or other operation of
law.
They are legal requirements with which law's subjects are bound to conform. An obligatory
act or omission is something the law renders non-optional. Since people plainly can violate their
legal obligations, “non-optional” does not mean that they are physically compelled to perform, nor
even that law leaves them without any eligible alternative.
4. What is a constructive obligation?
A constructive obligation is an obligation that is derived from an entity's actions where:
a. The entity has indicated to other parties that it will accept certain
responsibilities by reason of an established pattern of past practice, published
policy, or a sufficiently specific current statement.
b. And as a result, the entity has created a valid expectation on the part of other
parties that it will discharge those responsibilities.
NOTRE DAME OF MIDSAYAP COLLEGE
Midsayap, Cotabato
COLLEGE OF BUSINESS AND ACCOUNTANCY
2. Otherwise defined, a constructive obligation exists when the entity from an established
pattern of practice or stated policy has created a valid expectation that it will accept certain
responsibilities.
5. What is an obligating event?
The past event that leads to a present obligation is called an obligating event. An accounting
provision cannot be created in anticipation of a future event. The event must have already occurred
which gives rise to the legal or constructive obligation.
An obligating event is an event that creates a legal or constructive obligation because the
entity has no realistic alternative but to settle the obligation created by the event. This is the case
where:
a. The settlement of the obligation can be enforced by law.
b. The event creates valid expectations on the part of other parties that the entity will
discharge the obligation, as in the case of a constructive obligation.
6. Explain the terms probable, possible and remote in relation to a provision.
An outflow of resources is regarded as probable if the event is more likely than not to occur,
meaning, the probability that the event will occur is greater than the probability that it will not
occur. As a rule of thumb, probable means more than 50% likely or substantially more.
Possible means 50% or less likely to occur.
Remote means 10% or less likely to occur or very slight occurrence.
7. What is the measurement of a provision?
The amount recognized as a provision should be the best estimate of the expenditure
required to settle the present obligation at the end of reporting period.
The best estimate is the amount that an entity would rationally pay to settle the obligation
at the end of reporting period or to transfer it to a third party at that time. Where a single
obligation is being measured, the individual most likely outcome adjusted for the effect of other
possible outcomes may be the best estimate.
Where there is a continuous range of possible outcomes and each point in that range is as
likely as any other, the midpoint of the range is used.
Where the provision being measured involves a large population of items, the obligation is
estimated by "weighting" all possible outcomes by their associated possibilities. The name for this
statistical method of estimation is "expected value".
8. Explain a restructuring provision.
Recognition of the provision for restructuring is required because a constructive obligation
may arise from the decision.
A Constructive obligation for restructuring arises when two conditions are present:
1) The entity has a detailed formal plan for the restructuring which includes the following:
a. The business being restructured.
b. The principal location affected.
c. The location, function and approximate number of employees who will be
compensated for terminating their employment.
d. Date when the plan will be implemented.
e. The expenditures that will be undertaken.
3. 2) The entity has raised valid expectation in the minds of those affected that the entity will
carry out the restructuring by starting to implement the plan and announcing the main
features to those affected by it.
9. Define a contingent liability.
PAS 37, paragraph 10, defines a contingent liability in two ways:
1) A contingent liability is a possible obligation that arises from past event and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or more
uncertain future events not wholly within the control of the entity.
2) A contingent liability is a present obligation that arises from past event but is not
recognized because it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation or the amount of the obligation cannot
be measured reliably
10. Distinguish a contingent liability from a provision.
The second definition states that a contingent liability is a present obligation. However, the
present obligation is either probable or measurable but not both to be considered a contingent
liability.
If the present obligation is probable and the amount can be measured reliably, the
obligation is not a contingent liability but shall be recognized as a provision.
11. Explain the treatment of a contingent liability.
A contingent liability shall not be recognized in the financial statements but shall be
disclosed only. The required disclosures are: a. Brief description of the nature of the contingent
liability. b. An estimate of its financial effects. c. An indication of the uncertainties that exist. d.
Possibility of any reimbursement. If a contingent liability is remote, no disclosure is necessary.
12. Define a contingent asset.
PAS 37, paragraph 10, provides the following definition: A contingent asset is a possible
asset that arises from past event and whose existence will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not wholly within the control of the entity.
13. Explain the treatment of a contingent asset.
A contingent asset shall not be recognized because this may result to recognition of income
that may never be realized. However, when the realization of income is virtually certain, the related
asset is no longer contingent asset and its recognition is appropriate. A contingent asset is only
disclosed when it is probable. The disclosure includes a brief description of the contingent asset and
an estimate of its financial effects. If a contingent asset is only possible or remote, no disclosure is
required.
14. What is a decommissioning liability?
A decommissioning liability is an obligation to dismantle, remove and restore an item of
property, plant and equipment as required by law or contract. A decommissioning liability is also
called asset retirement obligation.
4. 15. Explain the treatment of a decommissioning liability.
The decommissioning liability is initially recognized at present value and included in the cost
of the related asset.
REFERENCES:
BOOK - Valix, C.T., Peralta, J.F., & Valix, C.A.M. (2020). Intermediate Accounting Volume 2:
Chapter 4: PROVISION Contingent Liability. GIC ENTERPRISES & CO., INC
