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Exam 6: Provisions, Contingent Liabilities and Contingent Assets

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Question 1

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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.

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Question 2

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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.

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Question 3

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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.

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

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

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

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

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:

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

The uncertainty that exists in relation to provisions is one of

Which of the following statements is correct?

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:

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

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?

Contingent liabilities are:

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:

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

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

Which of the following statements is correct?