Acca financial Accounting (FA) Study Text ac ca (FA)


Chapter 12  KAPLAN PUBLISHING



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Chapter 12 

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217 

Chapter summary 

 

 

 




 

Payables, provisions and contingent liabilities 

218

 

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Test your understanding answers 

 

Test your understanding 1 

 

(i) 


According to IAS 37, a contingency is an obligation or an asset that 

arises from past events whose existence will be confirmed only by 

the occurrence or non-occurrence of one or more uncertain future 

events not wholly within the control of the enterprise. A provision 

should be recognised if: 

(a)  there is an obligation. 

(b)  a transfer of economic benefits is probable. 

(c)  a reliable estimate can be made. 

The legal costs of $5,000 should therefore be provided for since 

they will have to be paid whatever the outcome of the legal case. 

However, the claim is not likely to succeed and so no provision 

should be made. A disclosure note should be made for the 

contingent liability (i.e. potential loss if Madras loses the court case) 

of $15,000. 

(ii)  According to IAS 37, an obligation can be legal or constructive. In 

this case the policy of refunds has created a constructive obligation 

and it has been reliably measured. A provision for $4,800 should 

therefore be made in the financial statements. 

(iii)  As it is regarded as probable that Madras will be required to pay 

compensation of $100,000 to the injured customer, it constitutes a 

present obligation as a result of a past obligating event, and should 

therefore be accounted for as a provision. The success of the 

counterclaim for $100,000 is also considered probable and would 

therefore need to be disclosed in the notes to the financial 

statements as a contingent asset (reimbursement). Only if it were 

considered virtually certain would the counterclaim be recognised as 

an asset in the statement of financial position. Note that, even if that 

was the case, the provision and contingent asset would be 

separately accounted for in the statement of financial position – they 

would not be netted off. 



 


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