Deck 6: Provisions, Contingent Liabilities and Contingent Assets

Question 1

The June 2005 Exposure Draft issued in relation to proposed changes to AASB 137:

A) will be issued as a standard applicable for reporting periods ending on or after 1 June 2014
B) has been withdrawn by the AASB
C) is still under consideration by the AASB
D) is already applicable

Answer 1

C

Question 2

According to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, when providing for the future, a future event such as the clean-up of a contaminated site, gains and other cash inflows that are expected to arise on the sale of asset related to the clean-up, must be treated as follows:

A) set-off against the provision for the clean-up;
B) measured separately of the provision;
C) recognised directly in equity in the period in which the cash inflows arose;
D) recognised as a deferred asset.

Answer 2

B

Question 3

A railway company is required, under law, to overhaul its rail-tracks every three years as a safety measure. The appropriate treatment of this event for the purposes of preparing financial statements is:

A) recognise as a provision for future maintenance costs;
B) estimate the future maintenance costs and charge as depreciation over the next three years;
C) disclose in the notes as a contingent liability, but do not recognise;
D) estimate the future cash outflows and discount to determine the amount to be recognised as a deferred liability.

Answer 3

B

Question 4

Liabilities which fail the recognition criteria and where the possibility of an outflow is remote should:

A) be recognised as an accrual
B) be recognised as a provision
C) be recognised as a contingent liability
D) not be recognised in the financial statement at all

Question 5

At balance sheet date, Raschella Limited was awaiting the final details of a court case for damages awarded in its favour. The amount and possible receipt of damages is unknown and will not be decided until the court sits again in several months time. How is this event dealt with in the preparation of the financial statements?

A) do not recognise or disclose in the financial statements as the possibility of receiving damages is remote;
B) recognise as an asset in the financial statements as the receipt of damages is probable;
C) disclose in the notes to the financial statements as it is possible that the entity will receive the damages and the court decision is out of its control;
D) recognise as a deferred asset in the statement of financial position and re-classify as a non-current asset when the court decision is known.

Question 6

The following is statement made in AASB 137 Provisions, Contingent Liabilities and Contingent Assets:
'a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it'.
This statement provides a definition of:

A) an onerous contract;
B) a deferred liability;
C) a future operating loss;
D) a present obligation.

Question 7

According to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate treatment for a contingent asset in the financial statements of an entity is:

A) disclosure of information in the notes, but do not recognise in the financial statements;
B) recognition in the financial statements, and note disclosure;
C) recognition in the financial statements, but no further disclosure in the notes;
D) do not recognise in the financial statements, and do not disclose in the notes.

Question 8

McCann Limited announced its plans for a major restructuring of its operations. Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the entity is able to:

A) capitalise all direct and indirect restructuring costs;
B) set up a provision for the best estimate of all restructuring costs;
C) provide only for restructuring costs that are directly and necessarily caused by the restructuring;
D) provide for restructuring costs that are associated with the ongoing activities of the entity.

Question 9

Which of the following is an example of a provision falling within the scope of AASB 137?

A) accruals
B) onerous contracts
C) employee benefits
D) future operating losses

Question 10

Provisions shall be recognised when:
I an entity has a present obligation
II it is possible that an outflow of resources will be required to settle the obligation
III the amount of the obligation can be reliably estimated
IV there has been a past event

A) I, II and III
B) II, III and IV
C) I, III and IV
D) I, II and IV

Question 11

Provisions in relation to which of the following balances are within the scope of AASB 137?

A) warranties
B) employee benefits
C) financial instruments
D) operating leases

Question 12

The following statement, contained in AASB 137 Provisions, Contingent Liabilities and Contingent Assets, defines:
' a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity'

A) a deferred liability;
B) a contingent liability;
C) a deferred asset;
D) a contingent asset.

Question 13

JayJay Limited estimated that the future cash outflows relating to settlement of warranty obligations would be as follows:
? In 1 year $40 000
? In 2 years $50 000
? In 3 years. $60 000.

A government rate for bonds with similar terms, is 6%. What is the present value of the total expected future cash outflow?

A) $132 563;
B) $140 510;
C) $150 000;
D) $159 000.

Question 14

Purcell Limited is a manufacturer of swimming pools and provides its customers with warranties at the time of sale. The warranty applies for three years from the date of sale. Past experience shows that there will be some claims under the warranties. The appropriate treatment of this item under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, is to:

A) disclose in the notes, but do not recognise in the financial statements;
B) recognise the best estimate of costs as a provision;
C) charge the costs directly to profit or loss in the period in which the economic outflows occur;
D) transfer the expected amount of the warranty from retained earnings to a special reserve account in equity.

Question 15

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate accounting treatment for future operating losses is to:

A) determine a reasonable estimate of the cost and provide for the future liability;
B) determine the cost and charge it directly against retained earnings;
C) not recognise such items in the financial statements;
D) measure on the basis of estimated future cash flows.

Question 16

In respect to a contingent liability, AASB 137 Provisions, Contingent Liabilities and Contingent Assets, requires disclosure of

A) any increase in the contingent liability during the period;
B) an estimate of its financial effect;
C) the carrying amount at the beginning and end of the period;
D) an indication of the uncertainties about the amount or timing of expected outflows.

Question 17

An event that gives rise to a present obligation, but which cannot be measured with sufficient reliability is an example of a:

A) liability
B) accrual
C) provision
D) contingent liability

Question 18

For each class of provision, an entity is required under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, to disclose the following information:
I The carrying amount at the beginning and end of the period.
II Amounts incurred and charged against the provision during the period.
III Comparative information.
IV Unused amounts reversed during the period.
V Additional provisions made during the period.

A) I, II, IV and V only;
B) I, II, and III only;
C) II, III and IV only;
D) I, III, IV and V only.

Question 19

Entity A has provided a bank guarantee to a bank in relation to a loan provided to entity B. Entity B is solvent and shows no signs of defaulting on the loan. The treatment of the bank guarantee in the records of entity A is to:

A) recognise a liability
B) recognise a provision
C) recognise a contingent liability
D) do nothing

Question 20

The uncertainty that exists in relation to provisions is one of

A) timing
B) amount
C) timing and amount
D) timing or amount

Question 21

An entity sells goods under warranty and past experience shows that minor defects account for 10% of sales and major defects account for 2% of sales. If all minor defects were repaired the warranty cost would be $300 000, and if all major defects were repaired the warranty cost would be $800 000. The expected value of the warranty cost is:

A) $0;
B) $22 000;
C) $46 000;
D) $86 000.

Question 22

Which of the following statements is correct?

A) a provision is a class of liabilities
B) a contingent liability is a class of liabilities
C) a provision is a class of contingent liabilities
D) contingent liabilities and provisions are classes of liabilities

Question 23

The June 2005 exposure draft issued in relation to AASB 137 proposed changes to:
I $\quad$ the name of the standard
II $\quad$ recognition and measurement criteria
III $\quad$ the definition of contingencies
IV $\quad$ the method of disclosure for provisions

A) I, II and III
B) II, III and IV
C) I, III and IV
D) I, II and IV

Question 24

A contingent liability is defined as a:
$\begin{array}{llll}&I&II&III&IV\\\text { possible obligation that arises from past events. } & \text { Yes } & \text { Yes } & \text { No }& \text { No } \\\text { possible obligation whose existence will be } & \text { Yes } & \text { No } & \text { Yes }& \text { No } \\\text { confirmed by the occurrence of an uncertain future } & & &\\\text { event}\end{array}$

A) I;
B) II;
C) III;
D) IV.

Question 25

The costs under an onerous contract are measured using which valuation method?

A) the lower of cost or net market value;
B) the lower of the cost of fulfilling the contract and the penalties arising from failure to fulfil the contract;
C) the present value method using a risk-free discount rate;
D) the unavoidable costs of meeting the obligations discounted by reference to market yields at reporting date.

Question 26

An example of where an entity has a present obligation is:

A) a public announcement made by an entity's management to undertake restructuring.
B) a recommendation from the HR manager to the Board as to the level of bonuses to be paid at year end.
C) a historical pattern of performing a major overhaul of machinery every two years.
D) the declaration of a dividend by directors which is required to be ratified at a meeting of shareholders

Question 27

Contingent liabilities are:

A) recognised in the financial statements unless the possibility of an outflow in settlement is remote.
B) recognised in the notes to the financial statements unless the possibility of an outflow in settlement is remote.
C) recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.
D) not recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.

Question 28

Which of the following statements is correct?

A) A present obligation is an example of a legal obligation.
B) A legal obligation is an example of a constructive obligation.
C) A constructive obligation is an example of an equitable obligation.
D) An equitable obligation is an example of a present obligation.

Question 29

Which of the following is not within the scope of AASB 137?

A) The treatment of future operating losses
B) The treatment of contingent assets
C) The treatment of restructuring provisions arising from a business combination
D) The treatment of onerous contracts

Question 30

Entities are not required to disclose which of the following in relation to provisions?

A) carrying amounts of provisions at the beginning of the period
B) amounts used during the period
C) the effect of any change in the discount rate used
D) comparatives