Advanced Financial Accounting FIN-611 Mian Ahmad Farhan Lecture-28 Events after Balance-sheet IAS-10 Provisions, Contingent Liabilities & Assets IAS-37

IAS-37 Provision, Contingent liabilities & Contingent Assets

Provisions Reduction in assets 1.Provision for doubtful debts 2.Provision for depreciation Increase in liabilities 1.Future Losses

Provision Provision is a liability of uncertain timing and events

Three Stages of Liabilities Certain liabilities Virtually certain liabilities Uncertain liabilities

Trade payables Accrued expenses Provision for losses Status (Present obligation) Certain liability Virtually certain liability Uncertain liability Resulting from (Past events) Certain liability Virtually certain liability Uncertain liability Outflow of economic benefit (Probable) Certain liability Virtually certain liability Uncertain liability Amount Certain amount Virtually certain liability Uncertain liability Timing Certain amount Virtually certain liability Uncertain liability

Journal Entries Trade payable Purchases A/c xxx Trade payable xxx Accrued expense Expenses xxx Accrued Expenses xxx Provision Expenses xxx Provision of losses xxx Against services Repair xxx Accounts payable xxx

Obligating Events Obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

Legal Obligation Legal obligation is an obligation that derives from a contract, legislation or other operation of law.

Constructive Obligation Constructive obligation is an obligation that derives from an entities action whereby an establish pattern of past practice, publish policies or sufficiently specifics amount statement the entity has indicating other parties that it will expects certain responsibilities and as a result the entity has created a valid expectation on the part of other parties that it will discharge those responsibilities.

Journal Entry Losses against warranty claim 1,000,000 Prevision against warranty 1,000,000 Warranty claim expense 1,200,000 Cash 1,200,000 Prevision against warranty 1,000,000 Warranty claim expense 1,000,000

Warranty expense Cash 1,200,000 1,200,000 Provision against warranty claim 1,200,000 Balance 200,000 1,200,000 Provision against warranty Balance b/d 1,000,000 1,000,000 Balance b/f 1,000,000 1,000,000

Journal Entry Losses against warranty claim 1,000,000 Prevision against warranty 1,000,000 Warranty claim expense 1,200,000 Cash 1,200,000 Prevision against warranty 1,000,000 Warranty claim expense 1,000,000

Journal Entry Losses against warranty claim 1,000,000 Prevision against warranty 1,000,000 Warranty claim expense 1,200,000 Cash 1,200,000 Prevision against warranty 1,000,000 Warranty claim expense 1,000,000

Prevision against warranty 300,000 Losses against warranty claim 300,000

Contingent liability A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly with in the enterprise's control. OR A Present obligation that arises from past event but is not recognized because a). It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. b). The amount of the obligation can not be measured with sufficient reliability.

StagesLiabilitiesAssets Certain Recognize Expense A/c xxx Liability A/c xxx Recognize Receivable assets A/c xxx Income A/c xxx Virtually certain (Accruals) Recognize Expense A/c xxx Accrued liability A/c xxx Recognize Accrued income A/c xxx Income A/c xxx Provision (Uncertain) Recognize Expense A/c xxx Provision A/c xxx Disclosure only Contingenci es Disclosure onlyNo disclosure Remote obligations No disclosure

LiabilityCreditorsAccrued expenses Provision liability Contingen t liability Contingen t liability Contingen t liability CertainVirtually certain Uncertain Present obligation  X Arising from past events  Probable outflow of economic benefit in future  X  Reliable estimation of value As per Invoice  X - Probable outflow Reliable Estimation —Treat contingent liability in both cases Disclosure required --- Remote Accounting treatment Expense/Re source A/c Payable A/C Expense A/C Accrual A/C Losses against warranty Dr Provision for warranty CR. No Entry only disclosure is required

Trade payablesAccrued expenses Provision for losses Status Certain liabilityVirtually certain liability Uncertain liability Present obligation Resulting from Past event Outflow of economic benefit Probable Amount Certain amountVirtually certainUncertain Timing CertainVirtually certainUncertain liability

Case-1Case-2Case-3 Status Possible obligation Present obligation Resulting from Past event Outflow of economic benefit Will be confirmed upon the happening or not happening of future events, not in the control of entity ProbableNot probable Amount A- Future events are not remote B- Future events are remote Cannot measure reliably A- Probability are not remote B- Probability are remote Timing Uncertain Accounting Treatment A- Disclosed in notes B- Not Disclosed in notes Disclosed in notesA- Disclosed in notes B- Not Disclosed in notes