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6- Provisions, contingencies and EARP - Coggle Diagram

- - - - Legal
        
        Derives from contract, legislation, or any other operation of law
      - Constructive
        
        By an established pattern of past practice, published policies or a sufficient specific current statement the entity has indicated to other that it will accept certain responsibilities
        
        As a result, the entity has created valid expectation on the part of those other parties that it will discharge those responsibilities
    - - If the event if more likely than not to occur
      - Probability of more than 50%
      - However, where there is a number of similar obligations, the probability should be based on a consideration of the population as a whole, rather than one single item
    - - Amount recognised is the best estimate of the expenditure required to settle the present obligations at the end of the reporting period
      - Allowing for uncertainties
        
        Where the provision being measured involves a large population of items
        
        Use expected values
        
        Where a single obligation is being measured
        
        The individual most likely outcome
      - Discounting of provisions
        
        Where the time value of money is material
        
        The discount rate should
        
        Be a pre-tax rate
        
        Appropriately reflect the risk associated with the cash flows
  - - - Details of general nature of the provision/ continencies must still be provided, together with an explanation of why it has not been disclosed
- - - - Lower of
        
        Cost of fulfilling the contract
        
        Penalties from failure to fulfill the contract
  - - - The scope of a business undertaken by an entity
      - Manner in which that business is conducted
    - - Sale or termination of a line of business
      - Closure of business locations or the relocation of business activities
      - Changes in management structure
      - Fundamental organizations that have a material effect on the nature and focus of the entity's operations
    - - Has detailed formal plan for the restructuring
      - Has raised a valid expectations in those affected that it will carry out the restructuring
        
        By starting to implement that plan or
        
        Announcing its main features to those affected by it
    - - No obligation arises until the entity has entered the binding sale agreement
    - - Direct expenditures arising from the restructuring, which are both
        
        Necessary entailed by the restructuring
        
        Not associated with the ongoing activities of the entity
      - The provision should not include
        
        Retraining or relocating continuing staff
        
        Marketing
        
        Investment in new systems and distribution networks
- - - - Arise from past events whose existence will be confirmed by the occurrence by one or more uncertain events not wholly within the control of the entity
    - - Arises from past events but are not recognised because
        
        It is not probable that an outflow of economic benefits will be required to settle the obligation
        
        Or, the amount of the obligation cannot be measured with sufficient reliability
  - - - Nature, estimate of financial effect , indication of uncertainties relating to the amount and timing of outflow, possibility of any reimbursement
- - - - Provide evidence of conditions that existed at the end of the reporting period
      - Example
        
        Settlement of court case that was ongoing at the reporting date
        
        Asset at reporting date was impaired
        
        Determination of proceeds of asset sold or cost of asset bought before the reporting date
        
        The determination of bonus payment if there are constructive obligation to pay at the reporting date
        
        The discovery of fraud or error resulting in incorrect FS
    - - Indicative of conditions that arose after the end of the reporting period
      - Example
        
        Acquisition or disposal or subs
        
        Announcement of a plan to discontinue an operation or restructure operations
        
        Destruction of an asset through accident
        
        Ordinary share transactions including the issue of share
        
        Changes in asset prices, foreign exchange rates or tax rates
        
        The commencement of litigation arising from an event after the reporting period
        
        Declaration of div. after the end of the reporting period