IAS:"A provision shall be recognized when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable (more likely than not, i.e., >50%) that an outflow of resources will be required to settle the obligation;
(c) the amount can be reliably estimated."
So provision must be probable(more than 50% likely); in other words, a possible or remote payment can't be a provision.
M
mrjonbainModerator·
Yes, only recognise when probable. Possible should be disclosed by note if material. Hope this helps.
S
S le·
Thank you for the lecture
If the accident happened after the year end why do we show it at all on the statements- it should be on next years statements?
J
John MoffatTutor·
If it happened after the year end, then yes it will be on next years statement. I do not say differently in the lecture :-)
S
S le·
but you do say that we will attach a note to last years statement?
J
John MoffatTutor·
Yes, we will disclose it by way of a note if the amount involved is material.
J
Jonathan·
John, I'm interested in how we classify and treat guarantees and warranties. The probability of product failure giving rise to a claim could be less than 2%, but the volume of sales might make at least one claim per year, virtually certain.
Let's say we allow a provision, based upon the expected claims in the year, does this liability 'behave' in the same way as, E.g. a provision for bad and doubtful debts? Thank you.
J
Jonathan·
Ah... No need to worry, I see now the warranty case may be treated as an allowance, and not a provision.
Back to FR!
A
amjad·
Dear sir, First of all thank you for helping students like us.
My understanding of contingent liability is that if obligation is probable then we should recognize it the financial statement.
If obligation is possible then disclose it in the financial statements by way of a note.
and if obligation is remote, do nothing.
Is my understanding is correct, if not please specify the correct treatment.
Thanking you in anticipation.
J
John MoffatTutor·
It is correct :-)
A
amjad·
Thank you very much sir for your prompt reply, iam really thankful for this but by listening to ur lecture i came to the conclusion that if accident happen before the year we will treat the contingent liability like provision but if the accident happens after the year end and the obligation to pay is probable or possible we will write a note and if its remote we will do nothing.
Am i correct please explain
J
John MoffatTutor·
Correct :-)
A
Abdul Aaron·
Thank you very much for this wonderful help that you offer to us. I feel good listening to your lectures and it makes me understand what I want to know.
if the accident happens after the year end why do we even consider showing it in THIS YEAR statements?
why not simply leave it for next years statement
A
Asif·
Sir, shouldn’t probable - possible - and remote tests be done only for contingent liabilities/assets; as the provision is certainly a liability and will have to be paid ?
I am somewhat confused because I find these tests mentioned for Provision - whose payment is not contingent (dependent). Only the time and amount is uncertain. But it will be paid and recorded.
T
Tianna·
I was thinking this too.
I went to the BPP text and there is a note under the contingency learning section that says " If an obligation is probable, it is not a contingent liability, instead a provision is needed and if it is remote, it requires no disclosure. "
So my understanding is that Probable falls under Provisions, but Possible and Remote falls under Contingent Liability.
Hope this helps.
A
Amritash·
Really good resources. Thank you
J
John MoffatTutor·
Thank you for your comment :-)
S
shagor·
About the contingent liability, we have to write a note if the accident takes place after the current year. I want to know how long after the end of the year we'll have to write a note in the current year's financial statement?
V
vishnu·
In contingent asset example in court case if we lose case we won’t receive money ? Right
It’s not clear video sound
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable (more likely than not, i.e., >50%) that an outflow of resources will be required to settle the obligation;
(c) the amount can be reliably estimated."
So provision must be probable(more than 50% likely); in other words, a possible or remote payment can't be a provision.
If the accident happened after the year end why do we show it at all on the statements- it should be on next years statements?
Let's say we allow a provision, based upon the expected claims in the year, does this liability 'behave' in the same way as, E.g. a provision for bad and doubtful debts? Thank you.
Back to FR!
My understanding of contingent liability is that if obligation is probable then we should recognize it the financial statement.
If obligation is possible then disclose it in the financial statements by way of a note.
and if obligation is remote, do nothing.
Is my understanding is correct, if not please specify the correct treatment.
Thanking you in anticipation.
Am i correct please explain
if the accident happens after the year end why do we even consider showing it in THIS YEAR statements?
why not simply leave it for next years statement
I am somewhat confused because I find these tests mentioned for Provision - whose payment is not contingent (dependent). Only the time and amount is uncertain. But it will be paid and recorded.
I went to the BPP text and there is a note under the contingency learning section that says " If an obligation is probable, it is not a contingent liability, instead a provision is needed and if it is remote, it requires no disclosure. "
So my understanding is that Probable falls under Provisions, but Possible and Remote falls under Contingent Liability.
Hope this helps.
It’s not clear video sound