ACCA Applied Skills · Financial Reporting
Provisions and Events After the Reporting Period for ACCA FR
A provision is a liability of uncertain timing or amount. Under IAS 37 you recognise it when there is a present obligation from a past event, an outflow is probable, and you can estimate it reliably. IAS 10 decides whether later events adjust the figures or are only disclosed.
What this chapter covers
This chapter covers two standards that students often mix up. IAS 37 deals with provisions, contingent liabilities and contingent assets. IAS 10 deals with events that happen between the end of the reporting period and the date the financial statements are authorised for issue.
Both standards ask the same basic question: what was the position at the reporting date? A provision needs an obligation that existed at that date. An adjusting event gives more evidence about conditions that existed at that date. A non-adjusting event relates to conditions that arose afterwards.
The chapter links to the rest of FR in several ways. Provisions feed into the statement of financial position and the statement of profit or loss, so they appear in the single-entity question and in group accounts adjustments. Events after the period often hide inside a scenario about inventory, receivables or litigation. Warranties, restructuring and onerous contracts also connect to revenue, leases and impairment, so expect them as small parts of larger questions.
This chapter is worth the effort because it is tested in both formats. In Section A and the Section B cases, you get short all-or-nothing questions asking whether to recognise, disclose or ignore an item. In Section C, a provision or an adjusting event is often one adjustment inside a longer question. The rules are few and logical, so a student who learns the recognition tests properly can pick up marks quickly, and a student who guesses will lose them just as quickly.
Provisions and events after the reporting period: topics in the order to study them
- 1Provisions, Contingent Liabilities and Assets (IAS 37)Start here because the three recognition tests and the split between provision, contingent liability and contingent asset underpin everything else in the chapter.
- 2Measurement of ProvisionsOnce you know when to recognise a provision, you learn how much to record, including best estimate, expected value and discounting.
- 3Specific Provisions: Restructuring, Onerous Contracts, WarrantiesThese apply the general rules to the three situations the exam uses most, so you need the general rules and measurement first.
- 4Events After the Reporting Period (IAS 10)Study this last because it reuses the idea of conditions at the reporting date and often affects provisions, such as a lawsuit settled after the year end.
How to prepare Provisions and events after the reporting period
Aim to know the rules well enough to apply them to a short scenario in under a minute. Then practise folding them into a longer written answer.
- Learn the three recognition tests for a provision and write them from memory: present obligation from a past event, probable outflow, reliable estimate.
- Build a simple decision table for the outcomes: provide, disclose as a contingent liability, or ignore. Do the same for contingent assets, which are only recognised when the inflow is virtually certain.
- Practise measurement with small numbers: best estimate for a single obligation, expected value for a large population, and discounting when the effect is material. Record the unwinding of the discount as a finance cost.
- For restructuring, onerous contracts and warranties, list the specific trigger for each. Then do a short question on each, writing the journal entry as well as the conclusion.
- For IAS 10, sort every example into adjusting or non-adjusting by asking whether it gives evidence of conditions at the reporting date. Remember that dividends declared after the period are not a liability.
- Finish with mixed objective questions under time pressure, then one Section C style question where you must explain your treatment in clear sentences and show the numbers.
Common mistakes in Provisions and events after the reporting period
Providing for a future cost because it is certain to happen, such as future repairs or a planned refurbishment.
Fix: Check for a present obligation from a past event. If the entity could avoid the cost by its future actions, there is no obligation and no provision.
Recognising a provision for a restructuring that has only been discussed by the board.
Fix: Look for a detailed formal plan plus a valid expectation in those affected, for example an announcement or start of implementation, before the reporting date.
Treating all events after the reporting period as adjusting, or all as non-adjusting.
Fix: Ask whether the event provides evidence about conditions that existed at the reporting date. If yes, adjust. If it reflects new conditions, disclose if material.
Recognising a contingent asset because the claim looks strong.
Fix: Remember the asymmetry: recognise only when the inflow is virtually certain. If it is only probable, disclose it.
Forgetting to discount or to book the unwinding of the discount in later years.
Fix: When a long-term provision is discounted, add the unwinding to the provision each year and charge it to finance costs.
Writing a conclusion in a Section C answer without explaining the reasoning.
Fix: State the rule, apply it to the facts in the scenario, then give the treatment and the figures. Marks are awarded for each step.
Last-day revision: Provisions and events after the reporting period
- A provision is a liability of uncertain timing or amount.
- Recognise a provision only if there is a present obligation from a past event, an outflow is probable, and a reliable estimate can be made.
- A present obligation can be legal or constructive.
- Probable means more likely than not.
- A contingent liability is disclosed, not recognised, unless the outflow is remote.
- A contingent asset is disclosed only when an inflow is probable and is recognised only when it is virtually certain.
- Use the best estimate: the most likely outcome for one item, expected value for many items.
- Discount the provision when the time value of money is material, and charge the unwinding as a finance cost.
- Do not provide for future operating losses or for costs that can be avoided by future action.
- A restructuring provision needs a detailed formal plan and a valid expectation in those affected, such as a announcement or start of implementation.
- An onerous contract provision is the lower of the cost of exiting and the cost of fulfilling the contract.
- Adjusting events give further evidence of conditions at the reporting date; non-adjusting events relate to conditions arising afterwards and are disclosed if material.
- Dividends declared after the reporting period are not recognised as a liability at the reporting date.
Provisions and events after the reporting period practice questions
- Which of the following events occurring after the reporting period but before the financial statements are authorised for issue is a non-adj…
- Harlow Co has a year end of 30 June 20X6. On 15 July 20X6 its board proposed a final dividend of $0.20 per share on 5 million shares, and sh…
- Vantage Co has a reporting date of 31 December 20X5 and its financial statements were authorised for issue on 20 March 20X6. On 10 February …
- Echo Co must pay to clean up contamination in three years' time. The expected cost at that date is $1,331,000, and the entity's appropriate …
- Which statement about the going concern basis and events after the reporting period is correct under IAS 10?
- Golf Co has a legal obligation to dismantle a plant at the end of its ten-year life. The present value of the dismantling cost is $50,000 at…
- At 31 December 20X5 Delta Co has sold 2,000 units of a product under warranty. Past experience shows 80% of units will have no defects, 15% …
- Which of the following best describes the amount that IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires an entity to …
Provisions and events after the reporting period in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Provisions and events after the reporting period: frequently asked questions
What is the difference between a provision and a contingent liability?
A provision is recognised in the statement of financial position because there is a present obligation, a probable outflow and a reliable estimate. A contingent liability is a possible obligation, or a present obligation that fails the probability or measurement test, so you only disclose it unless the outflow is remote.
Is a dividend declared after the reporting period an adjusting event?
No. Dividends declared after the reporting period are not a liability at the reporting date, so you do not recognise them. You disclose them in the notes if material.
When do I discount a provision?
Discount it when the effect of the time value of money is material, using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. In later years you add the unwinding of the discount to the provision and charge it as a finance cost.
How are provisions tested in the ACCA FR exam?
They appear in Section A and Section B objective questions, where you decide whether to recognise, disclose or ignore an item. They also appear as adjustments inside Section C questions, where you may need to calculate the amount and explain your treatment.