Provisions and Contingencies

Provisions are recognized when the entity has a present obligation, either legal or constructive, as a result of a past event; when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when the amount of the obligation can be estimated reliably. When the entity expects reimbursement of some or all of the expenditure required to settle a provision, the entity recognizes an asset for the reimbursement only when it is virtually certain that reimbursement will be received when the obligation is settled. 

The amount of the provision recognized is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. A provision is measured using the cash flows estimated to settle the present obligation; its carrying amount is the present value of those cash flows.

Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. 

Contingent liabilities are not recognized because their 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 entity. Contingent liabilities are disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. 

Contingent assets are not recognized in the financial statements but are disclosed when an inflow of economic benefits is probable. 

 Estimating provisions 

The entity, in the ordinary course of business, sets up appropriate provision for its present legal or constructive obligations in accordance with its policies on provisions and contingencies. In recognizing and measuring provisions, management takes risks and uncertainties into account.  

Comments

Post a Comment

Popular posts from this blog

Estimating useful lives of non-financial assets

The estimated useful lives of property and equipment are annually reviewed based on the period over which the assets are expected to be available for use and are updated if expectations differ from previous estimates due to physical wear and tear or technical and commercial obsolescence. The entity's management determines the estimated useful lives of its property and equipment based on the period over which the assets are expected to be available for use. The entity annually reviews the estimated useful lives of property and equipment based on factors that include asset utilization , internal technical evaluation, technological changes, environmental and anticipated use of assets tempered by related industry benchmark information. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in factors mentioned.  
Read more

Net realizable value (NRV) of inventories

Inventories are carried at NRV whenever the utility of it becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes (i.e., pre-termination of contracts). The estimate of the NRV is reviewed regularly. Estimates of NRV are based on the most reliable evidence available at the time the estimates are made on the amount the inventories are expected to be realized.  These estimates take into consideration fluctuations of price or cost directly relating to events occurring after reporting date to the extent that such events confirm conditions existing at reporting date.  The allowance account is reviewed periodically to reflect the accurate valuation in the financial records.  
Read more

Leases

Entity as Lessee   The entity assesses whether a contract is or contains a lease, at inception of the contract. The entity recognizes a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the entity recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.     The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined , the lessee use...
Read more