ACCT1511 Lecture Notes - Lecture 4: Contingent Liability, Employee Benefits
2.2 - Liabilities
Provisions – uncertain in timing or amount (recognized on balance sheet)
Contingent liabilities
• Possible obligation arising from past events but whose existence depends on future
events
• Liabilities that do not meet recognition criteria
• Disclosed in notes – not recognized on balance sheet
Provisions: May be current or non-current
• May arise from either a legal or constructive obligation:
Warranties – do’t kow whe or how ay will e laied
Employee benefits – timing is uncertain (e.g. annual leave)
• Reported separately from payables & accruals in balance sheet
• Creating a provision – Dr Expense & Cr Provision
• When redeemed – Dr Provision & Cr Cash/Inventory (refund vs replacement)
• Annual Leave – Dr Wages Expense, Cr Cash & Dr Annual Leave Expense, Cr Provision
When taken – Dr Provision for Annual Leave & Cr Cash
Leads to reduction in liabilities & expenses when leave is taken
When salary rates increase, costs company more to pay out leave
Contingent Liabilities:
• Possible obligation arising from past events & whose existence will be confirmed
with occurrence or non-occurrence of one or more uncertain future events not
wholly within control of entity
• Present obligation that arises from past events but not recognized because
Outflow of economic resources not probable
Amount of obligation cannot be measured with sufficient reliability
• If likely (50% chance), recognized as liability (if it meets recognition criteria)
• If 5-50%, disclosed as contingent liability in notes
• If remote (<5%), do nothing
Financing Options
• Debt (i.e. liabilities) – legal or constructive obligations
Borrowings, bonds, unsecured notes, leases
• Hybrid instruments – convertible notes, convertible preference shares
• Equity capital – residual interest in assets of entity after deducting liabilities
Ordinary shares, preferred shares
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Document Summary
Provisions uncertain in timing or amount (recognized on balance sheet) Contingent liabilities: possible obligation arising from past events but whose existence depends on future events, liabilities that do not meet recognition criteria, disclosed in notes not recognized on balance sheet. Provisions: may be current or non-current: may arise from either a legal or constructive obligation: Warranties do(cid:374)"t k(cid:374)ow whe(cid:374) or how (cid:373)a(cid:374)y will (cid:271)e (cid:272)lai(cid:373)ed. When taken dr provision for annual leave & cr cash. Leads to reduction in liabilities & expenses when leave is taken. When salary rates increase, costs company more to pay out leave. Amount of obligation cannot be measured with sufficient reliability. If likely (50% chance), recognized as liability (if it meets recognition criteria) If 5-50%, disclosed as contingent liability in notes. Financing options: debt (i. e. liabilities) legal or constructive obligations. Borrowings, bonds, unsecured notes, leases: hybrid instruments convertible notes, convertible preference shares, equity capital residual interest in assets of entity after deducting liabilities.
