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Chapter 34 – SMEs Provisions and Contingencies QUESTION 1. ". 3. 4.

e!ne e!ne a prov provisi ision on E#p$ain E#p$ain the the recogni recognition tion o% a provision provision E#p$ain E#p$ain the initia$ initia$ &eas're &eas're&ent &ent o% a provisio provision n E#p$ain the the &eas're&ent &eas're&ent (hen (hen the provision invo$ves a $arge pop'$ation o% ite&s ). E#p$ain the the &eas're&ent &eas're&ent (hen (hen the provision arises %ro& %ro& a sing$e sing$e o*$igation +. E#p$ain the the &eas're&ent &eas're&ent (hen (hen there there is a contin'o's range o% possi*$e o'tco&e and each point in that range is as $i,e$- as another . E#p$ain the treat&ent treat&ent o% rei&*'rse&en rei&*'rse&entt o% a provision provision /. E#p$ain E#p$ain the s'*se0' s'*se0'ent ent &eas're &eas're&ent &ent o% a provision provision . e!ne e!ne a continge contingent nt $ia*i $ia*i$it$it12. hat is is th the tr treat&ent o% o% co contingent $i $ia*i$it11. 11. ha hat are are the the di disc$os $os're a*o' a*o'tt th the con conti ting ngen entt $ia $ia*i *i$i $itt1". e!ne a contingent asset 13. 13. ha hat are are the the dis disc$os $os'res res a*o' a*o'tt conti ontin ngent ass asset 14. hat is the treat&ent o% contingent asset 1). 1). hat hat is 5pre 5pre6' 6'di dici cia$ a$ disc disc$o $os' s're re7 7 in in re$a re$ati tion on to a prov provis isio ion n

Pro*$e& 3481 M'$tip$e choice 9I:;S< 1. = pro provi visi sion on is a. A liabili liability ty of uncertai uncertain n timing timing or or amount amount b. A possible possible obligation obligation as a result of past event event that is of uncertain uncertain timing or amount c. An adjust adjustment ment to to the carrying carrying amount amount of asset asset d. A liabili liability ty of certain certain timing timing or amount amount 2. =n SME sha$$ recogni>e a provision in (hen a. The entity entity has a presen presentt obligation obligation as as a result result of a past event event b. It is probable probable that the entity will will be required required to transfer transfer economic benets in settlement c. The amount amount of the the obligatio obligation n can be estimat estimated ed reliabl reliably y d. All of these these are are require required d in recogni recognizing zing a provis provision ion

3. hen the provision invo$ves a $arge pop'$ation pop'$ation o% o% ite&s? the esti&ate o% the a&o'nt a. hall re!ect re!ect the weighing of all possible outcomes by their associated associated probabilities b. Is determin determined ed as the individ individual ual most most li"ely li"ely outcome outcome

c. #ay be the individual most li"ely outcome adjusted for the e$ect of other possible outcome d. Is the midpoint of the possible outcomes

4. hen the provision arises %ro& a sing$e o*$igation? the esti&ate o% the a&o'nt a. hall re!ect the weighting of all possible outcomes by their associated probabilities b. Is determined as the individual most li"ely outcome c. Is the individual most li"ely outcome adjusted for the e$ect of other possible outcomes d. Is the midpoint of the possible outcomes. Pro*$e& 348" M'$tip$e choice 9I==< 1. hich o% the %o$$o(ing ter&s is associated (ith recogni>ing a provision a. b. c. d.

%ossible &i"ely 'emote %robable

". Provisions are accr'ed *eca'se the $i,e$ihood o% an 'n%avora*$e o'tco&e is a. b. c. d.

(irtually certain )reater than *+, At least -*, %ossible

3. No sing$e a&o'nt (ithin a range is a *etter esti&ate than an- other a&o'nt. hat is the a&o'nt o% accr'a$ a. b. c. d.

ero The midpoint of the range The minimum of the range The ma/imum of the range

4. hat condition is necessar- to recogni>e an environ&enta$ $ia*i$it- a. The entity has an e/isting legal obligation and can reasonably estimate the amount of the liability b. The entity can reasonably estimate the liability c. The entity has an e/isting legal obligation d. The obligating event has occurs

). hich is not considered (hen eva$'ating (hether to record a $ia*i$it- %or pending $itigation

a. b. c. d.

Time period of the underlying cause of action The type of litigation involved The probability of an unfavorable outcome The ability to ma"e a reasonable estimate

+. = contingent $ia*i$ita. 0enitely e/ists as a liability but the amount and due date are indeterminable b. Is accrued even though not reasonably estimated c. Is the result of a loss contingency d. Is not recognize in the nancial statements

. hich o% the %o$$o(ing is not a contingent $ia*i$it- a. b. c. d.

A possible but uncertain obligation A present obligation that is not probable but measurable A present obligation that is probable but not measurable A liability of uncertain timing or amount

/. hich o% the %o$$o(ing is the proper (a- to report a pro*a*$e contingent asset a. b. c. d.

As an asset As deferred revenue As a disclosure only 1o disclosure or no accrual

. Contingent assets need not *e disc$osed (hen considered a. b. c. d.

(irtually certain %robable &i"ely %ossible

12. hich is the proper (a- to report a contingent asset? receipt o% (hich is virt'a$$- certain a. b. c. d.

As an asset As unearned revenue As a disclosure only 1o disclosure or no accrual

Pro*$e& 3483 9I:;S< =n SME gives (arranties at the ti&e o% sa$e to p'rchasers o% its prod'ct. Under the ter&s o% the sa$e? the SME 'nderta,ers to &a,e good? *- repair

or rep$ace&ent? &an'%act'ring de%ects that *eco&es apparent (ithin one -ear %ro& the date o% sa$e. On the *asis o% e#perience? it is pro*a*$e that there (i$$ *e so&e c$ai&s 'nder the (arranties. Sa$es o% P 12?222?222 (ere &ade even$- thro'gho't "214. The e#pendit'res %or (arrant- repairs and rep$ace&ent %or the prod'cts so$d in "214 are e#pected to *e &ade )2@ in "214 and )2@ in "21). The "21) o'tAo(s o% econo&ic *ene!ts re$ated to the (arrant- (i$$ ta,e p$ace on B'ne 32? "21). E#perience indicates that )@ o% prod'cts so$d re0'ire no (arrantrepairs? 3@ o% prod'cts so$d re0'ired &inor repairs costing 12@ o% the sa$e price? and "@ o% prod'cts so$d re0'ire &a6or repairs or rep$ace&ent costing 2@ o% sa$e price. The appropriate disco'nt %actor %or cash Ao(s e#pected to occ'r on B'ne 32? "21) is 2.)"3/. :'rther&ore? an appropriate ris, ad6'st&ent %actor to reAect the 'ncertainties in the cash Ao( esti&ates is an incre&ent o% +@ to the pro*a*i$it- (eighted e#pected cash Ao(s.

hat is the (arrant- provision on ece&*er 31? "214 a. b. c. d.

2+3+++ 22234++ 35++ +43+++

Pro*$e& 3484 9I:;S< 'ring "214? =n SME is the de%endant in a patent in%ringe&ent $a(s'it. The entit-s $a(-ers *e$ieve there is a 32@ chance that the co'rt (i$$ dis&iss the case and the entit- (i$$ inc'r no o'tAo( o% econo&ic *ene!ts. Do(ever? i% the co'rt r'$es in %avor o% the c$ai&ant? the $a(-ers *e$ieves that there is a "2@ chance that the entit- (i$$ *e re0'ired to pa- da&ages o% P"22?222 and an /2@ chance that the entit- (i$$ *e re0'ired to pada&ages o% P122?222. Other o'tco&es are 'n$i,e$-. The co'rt is e#pected to r'$e in $ate ece&*er "21). There is no indication that the c$ai&ant (i$$ sett$e o't o% co'rt. = @ ris, ad6'st&ent %actor to the pro*a*i$it(eighted e#pected cash Ao(s is considered appropriate to reAect the 'ncertainties in the cash Ao( esti&ates. =n appropriate disco'nt rate is )@ per -ear. The P o% 1 at )@ %or one period is .). On ece&*er 31? "214? (hat is the &eas're&ent i% the provision %or $a(s'it

a. b. c. d.

++3+++ 673+++ 68366+ 6*3564

Pro*$e& 348) 9I:;S< =n SME gives (arranties at the ti&e o% sa$e to p'rchasers o% its prod'ct. Under the ter&s o% the sa$e. SME 'nderta,es to &a,e good? *- repair or rep$ace&ent? &an'%act'ring de%ects that *eco&e apparent (ithin one -ear %ro& the date o% sa$e. On the *asis o% e#perience? it is pro*a*$e that there (i$$ *e so&e c$ai&s 'nder the (arranties. On ece&*er 31? "214? SME appropriate$- recogni>ed P)2?222 (arrantprovision. SME inc'rred and charged P142?222 against the (arrantprovision in "21). O't o% the provision o% P142?222? an a&o'nt o% P/2?222 is re$ated to (arranties %or sa$e &ade in "21). The increase d'ring "21) in the disco'nted a&o'nt recogni>ed as a provision on ece&*er 31? "214 arising %ro& the passage o% ti&e is P"?222. On ece&*er 31? "21)? SME esti&ated that it (o'$d inc'r e#pendit'res in "21+ to &eet the (arrant- o*$igations on ece&*er 31? "21) as %o$$o(sF )@ pro*a*i$it- o% P422?222 "2@ pro*a*i$it- o% P"22?222 )2@ pro*a*i$it- o% P/2?222 ")@ pro*a*i$it- o% P"2?222 =ss'&e %or si&p$icit- that the "21+ cash Ao(s %or (arrant- repairs and rep$ace&ents ta,e p$ace on B'ne 32? "21+. =n appropriate disco'nt rate is 12@ per ann'&. The P o% 1 at 12@ %or one -ear is 2.1 and the P o% 1 at 12@ %or + &onths 'ncertainties in the cash Ao( esti&ates is an incre&ent o% /@ to the pro*a*i$it- (eighted e#pected cash Ao(s. SME is a$so the de%endant in a *reach o% patent $a(s'it. Its $a(-ers *e$ieve there is a 2@ chance that the co'rt (i$$ not dis&iss the case and the entit- (i$$ inc'r o'tAo( o% *ene!ts. I% the co'rt r'$es in %avor o% the c$ai&ant? the $a(-ers *e$ieve that there is a +2@ chance that the entit- (i$$ pa- da&ages o% P"?222?222 and a 42@ chance that the entit- (i$$ *e re0'ired to pa- da&ages o% P1?222?222? Other a&o'nts o% da&ages are 'n$i,e$-.

The co'rt is e#pected to r'$e in $ate ece&*er "21+. There is no indication that the c$ai&ant (i$$ sett$e o't o% co'rt. = @ ris, ad6'st&ent %actor to the cash Ao(s is considered appropriate to reAect the 'ncertainties in the cash Ao( esti&ates. ;EQUI;EF Prepare the 6o'rna$ entries to record the provision in the records o% SME %or "214 and "21).