I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

200

 

Solution

 

(a) 

The business needs to set up a provision as follows. 

DEBIT Damages 

(SPL) 

$10,000 

CREDIT Provision 

(SOFP) 

 

$10,000 

EXTRACT FROM STATEMENT OF PROFIT OR LOSS 

 

$ 

Expenses 

 

Provision for damages 

10,000 

EXTRACT FROM STATEMENT OF FINANCIAL POSITION 

 

$ 

Non-current liabilities* 

Provision for damages 

10,000 

 

* Because it is uncertain when the amount relating to the provision will be paid, or indeed if it 

definitely will be paid, it is classified as a non-current liability.  

(b) 

The business needs to increase the provision. 

DEBIT Damages 

(SPL) 

$40,000 

CREDIT Provision 

(SOFP) 

 

$40,000 

Do not forget that the provision account already has a balance brought forward of $10,000, so we 

only need to account for the increase in the provision. 

EXTRACT FROM STATEMENT OF PROFIT OR LOSS 

 

$ 

Expenses 

 

Provision for damages 

40,000 

EXTRACT FROM STATEMENT OF FINANCIAL POSITION 

 

$ 

Non-current liabilities 

Provision for damages (10,000 + 40,000) 

50,000 

1.4 Difference between provision and accruals 

Whilst accruals and provisions are both liabilities, a provision is a liability of uncertain timing or amount, 

however for an accrual, the timing and amount to be paid is almost certain. An estimate is still required 

for an accrual but it is more reliable than provision.  

1.5 Measurement of provisions 

The amount recognised as a provision should be the best estimate of the expenditure required to settle 

the present obligation at the end of the reporting period. The estimates will be determined by the 

judgement of the entity's management supplemented by the experience of similar transactions. If the 

provision relates to just one item, the best estimate of the expenditure will be the most likely outcome.  

When a provision is needed that involves a lot of items (for example, a warranty provision, where each 

item sold has a warranty attached to it), then the provision is calculated using the expected value 

approach. The expected value approach takes each possible outcome (ie the amount of money that will 

need to be paid under each circumstance) and weights it according to the probability of that outcome 

happening. This is illustrated in the following example.   

(IAS 37, paras. 36–39) 

1.6 Example: warranty provision  

Parker Co sells goods with a warranty under which customers are covered for the cost of repairs of any 

manufacturing defect that becomes apparent within the first six months of purchase. The company's past 

experience and future expectations indicate the following pattern of likely repairs. 

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CHAPTER 11  

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  PROVISIONS AND CONTINGENCIES