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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

At the reporting date, Kestrel Co has a present obligation from a past event for which a payment is probable and a reliable estimate can be made. Which accounting entry is correct when the provision is first recognised?

Debit the expense in profit or loss and credit a provision liability. IAS 37 requires recognition when a present obligation exists from a past event, an outflow is probable and a reliable estimate is possible, so the cost is recognised immediately rather than only disclosed.

  1. ADebit statement of profit or loss expense, credit provision liabilityCorrect
  2. BDebit provision liability, credit statement of profit or loss expense
  3. CDebit retained earnings directly, credit cash
  4. DDisclose in the notes only, with no entry

Explanation

IAS 37 requires a provision when there is a present obligation, a probable outflow and a reliable estimate. The entry charges an expense to profit or loss and creates a liability. Note disclosure only applies to contingent liabilities that are possible or not reliably measurable.

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