1. Provision:
    A provision is an uncertain future obligation that the business may or may not have to settle.

    You can only recognize the provision if these 3 criteria are met: (mnemonics: POR)

    P: probable that resources will be transferred to settle the liability(asset/other resources);
    O: present obligation whether it’s legal (law) or constructive (published information) from past event;
    R: reliable estimate of the amount of payment can be made.

    Double entry:

    DR Relevant expense a/c       (Statement of profit or loss and other comprehensive income)

    CR Provision                    (Statement of financial position)

  1. Disclosure: (to show how the opening provision may be reconciled to the closing provision)

     

    Opening provision     $55m

    Provision$20m

    Closing provision      $75m

 

  1. contingent liabilities

    A contingent liability exists when:

    Situation1:

    A possible obligation that arises from past events and existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

     

    Situation2:

    A present obligation that arises from past events but it fails criteria P and R (above) of a provision.

     

    Disclosure:

    1. nature of contingent liability
    2. likely financial effect
    3. uncertainty of the amount and timing
  2.  

  3. contingent assets

    A contingent asset arises from probable future income.

    Situation:

    It is a probable/possible asset that arises from past events whose existence in confirmed by the occurrence or non occurrence of uncertain future events not wholly within the control of the entity.

     

    If it becomes virtually certain(>95%) that the company can receive the asset rather than just a contingent asset so that they can recognize the asset in the financial statements rather than disclose it.

     

    Disclosure: (when it’s probable)

    1. nature of contingent liability
    2. likely financial effect

     

    To sum up:

      Liability (outflow) Asset  (inflow)
    Probable(>50%) Provide (provision) Disclose
    Possible(20%-50%) Disclose Ignore
    Remote(<20%) Ignore Ignore