Question 1

With regards to restructuring a business, a liability is only recognized after the entity has incurred the cost of the restructuring.

Accepted Answer

A) True 
 B)False  False

Question 2

Climbing Entity (CE) started selling harnesses to mountain climbers around the world in 20X7. In November, 20X8, CE discovered that a buckle on its harnesses was defective and failed when the harness was heavily stressed. FE has a warranty policy against defective harnesses and anticipates (it is more likely than not) that thousands of harnesses will be returned to the entity.
-How will CE determine whether to recognize a provision according to IAS 37?

Accepted Answer

CE will determine whether to recognize a provision by evaluating the three criteria. 
1) Does FE have a present obligation as a result of a past event? 
Yes. The obligating event was the sale of the harnesses with a warranty attached to the sale.
2) Is it more likely than not that an outflow of resources will be required to fulfill the obligation?
Yes. CE anticipates that harnesses will be returned and that it will refund the purchase prices.
3) Can the amount of the obligation be reasonably estimated?
Yes. The cost of a refund or warranty is known and thus the total cost can be reasonably estimated.
Therefore, CE must recognize a provision and measure at the best estimate of how much it will cost to settle the warranty obligation (refund/repair the harnesses).

Question 3

To disclose a Contingent Asset under IFRS, the likelihood of realizing the asset must be at least 50 percent.

Accepted Answer

A) True 
 B)False  True

Question 4

Even if the use of assets to settle a provision is several years away, you do not need to take into account the time value of money.

Accepted Answer

A) True 
 B)False

Question 5

In May 20X7, Chengu Entity (CE) decided to consolidate its operating facilities into one office located in Xaimen, China. In order to do this, CE had to shut down one of its facilities located in Surabaya, Indonesia. The Indonesian location was vacated in September, 20X7. CE has 2 years remaining on its lease in Indonesia and the lease is only cancellable under a $40,000 penalty payment. The present value of Elite's remaining payments is $27,000. How does CE account for this event?

Accepted Answer

The answer of In May 20X7, Chengu Entity (CE) decided...

Question 6

Compare and contrast US GAAP's interpretation of probable, to IFRS's. What are the implications of the differences in interpretation?

Accepted Answer

The answer of Compare and contrast US GAAP's interpretation of...

Question 7

Which of the following is recognized in the financial statements under IFRS?

Accepted Answer

A)  Contingent Assets 
B)  Contingent Liabilities 
C)  Provisions 
D)  None of the above 
A)  Contingent Assets 
B)  Contingent Liabilities 
C)  Provisions 
D)  None of the above

Question 8

To recognize a provision for restructuring, the plan for restructuring has been announced to those affected by the plan.

Accepted Answer

A) True 
 B)False

Question 9

Remington Entity (RE) developed a patent in waffle making. The patent is completely unique. Flap Jack & Jill Entity (FJJE) violated the patent and RE sued FJJE. RE's lawyers are optimistic that they will win and that the winnings will be $80,000 in three years. RE has a discount rate of 10 percent. How much of a contingent asset is RE allowed to recognize at this time?

Accepted Answer

A)  $80,000 
B)  $60,015 
C)  $0 
D)  none of the above 
A)  $80,000 
B)  $60,015 
C)  $0 
D)  none of the above

Question 10

What is the correct treatment of an event if the likelihood is probable that a possible gain will result in an inflow of benefits?

Accepted Answer

A)  The event must be disclosed. 
B)  A provision must be established for the event. 
C)  Management must use judgment in determining how to report the event. 
D)  The event does not need to be disclosed or a provision provided. 
A)  The event must be disclosed. 
B)  A provision must be established for the event. 
C)  Management must use judgment in determining how to report the event. 
D)  The event does not need to be disclosed or a provision provided.

Question 11

Contingent liabilities are not recognized in the financial statements under IFRS.

Accepted Answer

A) True 
 B)False

Question 12

Lily Company signed a contract to produce their one-of-a-kind toy flowers for Han Company. Lily Company was to receive $100,000 upon filling the obligation to produce 1,000 toy flowers. The cost of a certain rare-metal rose 200 percent just after the contract was signed. The unexpected rise in the metal meant that Lily Company would lose $30,000 on the contract. The Contract included a nonfulfillment penalty of $10,000. At what amount should Lily Company recognize for the provision?

Accepted Answer

A)  $30,000 
B)  $130,000 
C)  $10,000 
D)  none of the above 
A)  $30,000 
B)  $130,000 
C)  $10,000 
D)  none of the above

Question 13

Provisions related to operating losses are not recognized under IFRS.

Accepted Answer

A) True 
 B)False

Question 14

The textbook discusses the three liability recognition criteria, what are they? And why are they important for contingencies?

Accepted Answer

The answer of The textbook discusses the three liability recognition...

Question 15

Rank the following liabilities from 1-4 by degree of uncertainty, with 1 being the most certain and 4 being the most uncertain.

Accepted Answer

A)  Rent Payable ________ 
B)  A lawsuit where a loss is possible but inestimable _________ 
C)  Mortgage guarantee for an individual with good credit ________ 
D)  Flood insurance on a skyscraper not in a flood zone _______ 
A)  Rent Payable ________ 
B)  A lawsuit where a loss is possible but inestimable _________ 
C)  Mortgage guarantee for an individual with good credit ________ 
D)  Flood insurance on a skyscraper not in a flood zone _______

Question 16

Contingent Assets are not disclosed, even if the contingency is probable.

Accepted Answer

A) True 
 B)False

Question 17

What is the correct treatment of an event if the likelihood is remote that a possible loss will result in an outflow of benefits?

Accepted Answer

A)  The event must be disclosed. 
B)  A provision must be established for the event. 
C)  Management must use judgment in determining how to report the event. 
D)  The event does not need to be disclosed or a provision provided. 
A)  The event must be disclosed. 
B)  A provision must be established for the event. 
C)  Management must use judgment in determining how to report the event. 
D)  The event does not need to be disclosed or a provision provided.

Question 18

Which of the following is a required disclosure for a provision?

Accepted Answer

A)  An explanation of the nature of the obligation 
B)  Information about the timing of Cash Flows 
C)  Any assumptions made 
D)  All of the above 
A)  An explanation of the nature of the obligation 
B)  Information about the timing of Cash Flows 
C)  Any assumptions made 
D)  All of the above

Question 19

Papenfuss' Pet Pampering Palace is a dog grooming service and producer of specialty shampoos for dogs. Recently, a product has been causing rashes on the dogs. Their attorneys estimate that the likelihood that the defendant loses is high, and that the most likely payout will be $10,000,000 in three years. Papenfuss' Pet Pampering Palace can normally earn an 8 percent return on their investment. At what amount should they disclose the amount of the probable loss from the lawsuit? What amount would they have disclosed if the likelihood of losing were low?

Accepted Answer

The answer of Papenfuss' Pet Pampering Palace is a dog...

Question 20

Under IFRS, a provision may be reversed if it is no longer probable that an outflow of assets is likely to occur to settle the obligation.

Accepted Answer

A) True 
 B)False

Exam 24: Provisions, Contingent Liabilities, and Contingent Assets

With regards to restructuring a business, a liability is only recognized after the entity has incurred the cost of the restructuring.

To disclose a Contingent Asset under IFRS, the likelihood of realizing the asset must be at least 50 percent.

Even if the use of assets to settle a provision is several years away, you do not need to take into account the time value of money.

Compare and contrast US GAAP's interpretation of probable, to IFRS's. What are the implications of the differences in interpretation?

Which of the following is recognized in the financial statements under IFRS?

To recognize a provision for restructuring, the plan for restructuring has been announced to those affected by the plan.

What is the correct treatment of an event if the likelihood is probable that a possible gain will result in an inflow of benefits?

Contingent liabilities are not recognized in the financial statements under IFRS.

Provisions related to operating losses are not recognized under IFRS.

The textbook discusses the three liability recognition criteria, what are they? And why are they important for contingencies?

Rank the following liabilities from 1-4 by degree of uncertainty, with 1 being the most certain and 4 being the most uncertain.

Contingent Assets are not disclosed, even if the contingency is probable.

What is the correct treatment of an event if the likelihood is remote that a possible loss will result in an outflow of benefits?

Which of the following is a required disclosure for a provision?

Under IFRS, a provision may be reversed if it is no longer probable that an outflow of assets is likely to occur to settle the obligation.

Introduction to International Financial Reporting Standards Ifrs

Conceptual Framework for Financial Reporting

Fair Value Measurement

Presentation of Financial Statements

Statement of Cash Flows

Accounting Policies, Estimates, and Errors

Events After the Reporting Period

Related Party Disclosures

Earnings Per Share

Operating Segments

Inventories

Financial Instrumentsrecognition and Measurement

Financial Instrumentspresentation

Financial Instrumentsdisclosures

Property, Plant, and Equipment

Intangible Assets

Investment Property

Impairment of Assets

Leases

Revenue From Contracts With Customers

Income Taxes

Employee Benefits

Share-Based Payments

The Effects of Changes in Foreign Exchange Rates

Hyperinflation

Business Combinations

Consolidated Financial Statements

Investments in Associates and Joint Ventures

Joint Arrangements

Disclosure of Interests in Other Entities

Separate Financial Statements

Interim Financial Reporting

Non-Current Assets Held for Sale and Discontinued Operations

Regulatory Deferral Accounts

Borrowing Costs

Accounting and Reporting by Retirement Benefit Plans

Accounting for Government Grants and Disclosure of Government Assistance

Insurance Contracts

Exploration for and Evaluation of Mineral Resources

Agriculture

First-Time Adoption of International Financial Reporting Standard

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