ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies
Under IAS 37, which of the following is a condition that must be met before a provision is recognised?
A provision is recognised when there is a present obligation arising from a past event, an outflow is probable, and a reliable estimate can be made. Future operating losses and merely possible outflows do not qualify, so the first option is correct.
- AThe entity has a present obligation arising from a past event and a reliable estimate can be madeCorrect
- BThe entity has approved a budget for expected future operating losses
- CThe entity expects to incur a cost in the future and the board has discussed it
- DThe outflow of economic benefits is possible and the amount is known
Explanation
IAS 37 requires a present obligation (legal or constructive) from a past event, a probable outflow of economic benefits, and a reliable estimate. Future operating losses are never provided for. A merely possible outflow leads to disclosure of a contingent liability, not a provision.
Did you get it right without looking?
One question tells you little. A timed set on Provisions and contingencies shows your real accuracy, how long you take and where you lose marks.
More Provisions and contingencies questions
- Dalton Co sells goods with a warranty. Past experience suggests that of 1,000 units sold in the year, 80% will need no repair, 15% will need…
- Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which amount should be recognised as a provision when an entity has a…
- Which statement about contingent liabilities under IAS 37 is correct?
- Which of the following is a contingent liability rather than a provision under IAS 37?
- Marlowe Co has a December year end. In November 20X5 its board decided to close a factory in 20X6, but by 31 December 20X5 it had not starte…
- Zeta Co is defending a lawsuit brought by a customer. Its lawyers advise that it is possible, but not probable, that Zeta will lose and have…