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on the tabble it says if an asset is possibe ignore it and if its probable you disclose it as a contingent asset, so does that mean when defining what a contingent asset is you say a probable asset and not a possible asset?
I did an exercise about oil platform yesterday, and the accounting treatment to provision of dismantling the oil platform was to capitalise(I am not sure if it is appropriate to say this, but I mean the provision is added into part of the cost of the platform). But why should we make provision part of an asset? Thanks if anyone can help me solve this.
Hi Melody – it’s one of those special situations! Where an asset involves site restoration costs at the end of the asset’s life, the best estimate in today’s terms of the cost of site restoration should be provided as though it were payable in the future and discounted to today. I believe the question you were looking at involved restoration costs of 300 million present value. So it has already been discounted. Now, as each year goes by, we not only unroll the discount but, in addition, we need to re-estimate the current day costs of site restoration and adjust our original estimate.
Why capitalise? Because that’s what IAS 37 tells us to do!
Thanks, I guess I know what you mean. But I also encounter another similar question Borough examined in 12/11. What’s the differences between fixed costs and variable costs in the accounting treatment of the provision of environment cleaning? In that question, I believe it both the fixed costs and variable costs should be discounted and show the present value in the non-current asset part of statement of financial position. But the answer to the question is completely different.
It was a good and thorough lecture with nicely explained examples. Thank You.
If i may clear a doubt, that as the major difference between provision and contingent liability depends on probability of an outcome i.e. probable & possible, then doesn’t it open a wide area for organisations to play with it.
A company with help of their legal department or other ways can make an event probable from possible. So, is IAS 37 really reducing the penembral areas.
Hope i am making sense.
Thanks for your help!
Hi Arun – what you are suggesting is an element of creativity in financial statement preparation! Penumbral means that an IAS has been found to be necessary to try to eliminate such creativity.
However, of course, you’re correct. That’s why auditors need experts. Why auditors have to approach an assignment with a healthy degree of professional scepticism. Why the Financial Reposting Council is recommending an even GREATER degree of professional scepticism.
But who, in their right minds, would ever accuse a qualified accountant of manipulation / creativity / distortion? It lies beyond the comprehension of the ordinary man!
Hi Mr Mike,
If I may ask a question, I really thought the percentage we are given in example 3 is only for us to be able to indicate whether it is probable so we would consider it a provision, or possible so we would treat it as a contingent liability. But you were saying 42% of $300,00 is 126,000 and later in the lecture you talked about increasing provisions if needed.
I am confused here, I really thought if I am gonna treat it as a contingent liability then I will treat the whole 300,000, if I will treat it as a provision, same thing. I don’t get the logic of taking a percentage of the amount and increasing it if the probability increases, because at the end if we have to pay something, we will pay the whole 300,000, so why consider only a percentage! Or do we consider the full amount?
I hope my question is clear, thanks a lot.
But if it’s only say 60% certain, there is only a 60% chance of having to pay 300,000 and a 40% chance of paying nothing. So, applying the concept of expected values, we arrive at 60% x 300,000 + 100% x zero = 180,000.
The lesson? Apply expected values if the concept is applicable
Oh! I see. so I should take a percentage of the amount…
Many thanks Mr. Little!
Maha – expected values are used where there is a combination of possible outcomes
In the above example which you quote, if there’s a 40% chance of losing a case, then that must mean there’s a 60% chance of winning it – so NO PROVISION would be made – it would simply feature in a disclosure note
If, however, there was a 70% chance of losing and therefore only 30% chance of winning, then a provision is needed. The amount to provide is the FULL potential estimated liability – not 70% of the estimated liability. As time passes, the directors need to re-assess the potential liability and make extra provision as appropriate
Lecture was good, however my Adobe flush player was crushed and this some how affected my learning.
Loved the lecture!..
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