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I have couple of questions regarding IAS 37 because i totally lost here. Sorry for asking such a lengthy question.
Contingent Liability:
1. IF virtually certain (more than 95%) then it is not a contingent liability and should be recognised as liability (either current or non-current liability) in SOFP.
2. IF probable (more than 50%) then it is not a contingent liability and should be treated as liability in SOFP (likewise virtually certain).
3. IF possible (between 5 – 50%) then it is a contingent liability and should be disclosed by note.
4. IF remote (less than 5%) then we do nothing because it is neither recognised or disclosed.
Contingent Asset:
5. IF virtually certain (more than 95%) then it is not a contingent asset and should be recognised as receivable under current assets in SOFP.
6. IF probable (more than 50%) then it is a contingent asset and should be disclosed by note.
7. IF possible (between 5 – 50%) then we do nothing because it is neither recognised or disclosed.
8. We make provision for contingent liability when the event had occurred before the year-end then we will use the probability table to decide whether to Recognize liability / Disclose contingent liability / Do nothing etc.
9. The probability table is relevant when the event had occurred before the year-end but probability table becomes irrelevant when the event had occurred after the year-end because then it comes under IAS 10 and treated as non-adjusting event which will be disclosed (unless it is remote).
10. Both contingent asset & contingent liability are disclosed by note to SOPL but not recognised in the financial statement.
11. What does the ‘provision’ mean in accounting & when do we make this?
12. Is it true that when we don’t know the amount or timing of a contingent liability we make provision against it which is simply an estimate amount in case we lost the court case which will be adjusted later (if wrong) by overstating and understating once we would be certain about the contingent liability that will be paid.
Your points 1 to 10 are correct.
Contingent liabilities and assets depend on something else happening and how we deal with them depends on the probability as you have written.
A provision is where we are going to owe money (for example there will be tax owing at the end of the year – it is not contingent on sometime else happening) but we are not certain as to the amount and so we make a best estimate.
Thanks it was a great relief ?
Please correct me here too.
1) Provision is when we put aside funds for uncertain losses in the future although we do not know the actual amount of the liability?
2) IF it is not certain but rather anticipated then do we adjust the amount of provision once we know the real amount of the liability in the future?
3) Let say we make provision for $10000 but the liability is $15000 then do we make adjust our understated provision by $5000?
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