Standards.docx - Standards IAS 37 A provision is a...

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Standards IAS 37 A provision is a liability of uncertain timing or amount Recognise when 1. There is an obligation (constructive or legal) 2. There is a probable outflow 3. It is reliably measurable Measurement of a Provision The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Contingent Liabilities These are simply a disclosure in the accounts They occur when a potential liability is not probable but only possible (Also occurs when not reliably measurable) Probability test for Contingent Liabilities Remote chance of paying out - Do nothing Possible chance of paying out - Disclosure Probable chance of paying out - Create a provision Contingent Assets Here, it is not a potential liability, but a potential asset. The principle of PRUDENCE is important here, it must be harder to show a potential asset in your accounts than it is a potential liability. This is achieved by changing the probability test. For a potential (contingent) asset - it needs to be virtually certain (rather than just probable).
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Probability test for Contingent Assets Remote chance of receiving - Do nothing Possible chance of receiving - Do nothing Probable chance of receiving - Disclosure Virtually certain of receiving - create an asset in the accounts IAS 38 A company cannot show anything in its accounts higher than what they’re actually worth “What they’re actually worth” is called the “Recoverable Amount” So no asset can be in the accounts at MORE than the recoverable amount. Less is fine, just not more. So, assets need to be checked that their NBV is not greater than the RA. If it is then it must be impaired down to the RA So how do you calculate a Recoverable Amount? There are 2 things an entity can do with an asset 1. Sell it or 2. Use it It will obviously choose the one which is most beneficial So, you'll choose the higher of the following FV-CTS (Fair value less costs to sell) VIU (Value in use) So the higher of the FV - CTS and VIU is called the Recoverable amount Recognition of an Impairment Loss An impairment loss should be recognised whenever RA is below carrying amount.
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The impairment loss is an expense in the income statement Adjust depreciation for future periods. Identifying an Asset That May Be Impaired At each balance sheet date, review all assets to look for any indication that an asset may be impaired. If there is an indication that an asset may be impaired, then you must calculate the asset’s recoverable amount... to see if it is below carrying value if it is - then you must impair it We also check the following ANNUALLY regardless of whether there has been an impairment indicator or not: 1. an intangible asset with an indefinite useful life 2. an intangible asset not yet available for use 3. goodwill acquired in a business combination Reversal of an impairment loss for goodwill is prohibited.
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