IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – Theory – 2

The amount recognised as a provision shall __________

An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor defects were detected in all products sold, repair costs of 1 million would result. If major defects were detected in all products sold, repair costs of 5 million would result.

The entity’s past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. What is the expected cost of repairs of the entity?

The amount of the provision shall be measured after tax.

Which of the following shall be taken into account when measuring the best estimate of a provision?

Where the effect of the time value of money is material, the amount of a provision shall be __________ of the expenditures expected to be required to settle the obligation.

When measuring the best estimate of a provision, the discount rate shall reflect risks for which future cash flow estimates have been adjusted.

An entity X believes that the cost of cleaning up a site at the end of its life will be reduced by future changes in technology. Which of the following will more likely be not reflected in the amount of a provision for cleaning up a site in the entity’s financial statements?

Gains from the expected disposal of assets shall not be taken into account in measuring a provision.

Where the expenditure required to settle a provision is expected to be reimbursed by another party, __________.

In the statement of comprehensive income, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.