Provisions -

A provision is an existing liability of timing or uncertain amount.

The essence of a provision is that there is uncertainty about the timing or amount at the future
expenditure.
The liability exists at the end of the reporting period but the amount Indefinite or the date when the
obligation is due is also indefinite, and in some cases, the payee cannot be identified or determined.
Actually, a provision may be the equivalent of an estimated liability or a loss contingency that is accrued
because It is both probable and measurable.

Contingent Liability - This refers to a potential obligation that arises from past events but is uncertain in
timing or amount. A contingent liability may become an actual liability only if certain future events occur
or fail to occur. If the outcome of these events is uncertain and not wholly within the control of the entity,
the contingent liability is disclosed in the financial statements but not recognized as a liability until the
obligation becomes probable and its amount can be reliably measured.

PAS 37, paragraph 10, defines a contingent liability in two

ways:
1. A contingent liability is a possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly
within the entity's control.
2. A contingent liability is a present obligation that arises from past event but is not recognized because
it is not probable that a transfer of economic benefits will be required to settle the obligation or the
amount of the obligation cannot be measured reliably.

Difference between contingent liability and provision

The second definition of contingent liability states that a contingent liability is a present obligation.
However, the present obligation is either probable or measurable but not both to be considered a
contingent liability.
If the present obligation is both probable and measurable, it is not a contingent liability but a provision
to be recognized in the financial statements.
Contingent Asset
PAS 37, paragraph 10, defines a contingent asset as a "possible asset that arises from past event' and
whose existence will be confirmed by the occurrence or nonoccurrence of one or more
uncertain future events not wholly within the entity's control"
A contingent asset shall not be recognized because this may result to recognition of income that may
never be realized.
However, when the realization of income is virtually certain, the related asset is no longer contingent
asset and its recognition is appropriate.
A contingent asset is only disclosed when it is probable. The required disclosures in relation to a
contingent asset are:
a. Brief description of the contingent asset.
b. An estimate of the financial effect.
If a Contingent asset is only possible or remote, no disclosure is required.

Explain the three ranges Of outcome of future uncertain events.

The uncertainty relating to future events can be expressed by a range of outcome.

The range of outcome may be described as follows:
a. Probable — The future event is likely to occur. As a rule of thumb, probable means more than
50% likely.
b. Reasonably possible — The future event is less likely to occur
c. Remote — The future event is least likely to occur Or the chance of the future event occurring is
very slight.

Measurement of a provision
The amount recognized as a provision should be the best estimate of the expenditure required to
settle the present obligation at the end of reporting period.
The best estimate is the amount that an entity would rationally pay to settle the obligation at the
reporting date or to transfer it to a third party at that time.
Where a single obligation is being measured. the individual most likely outcome may be the best
estimate. However, even in such a case, the entity shall consider other possible outcomes.
Where there is a continuous range of possible outcomes and each point in that range is as likely
as any other. the midpoint of the range is used.
Example of provisions are warranty because there is clear legal obligation arising from an
obligating event which is the sale of the product with warranty.
Restructuring

Examples of events that may qualify as restructuring include:

a. Sale or termination of a line of business.
b. Closure of business location in a region or relocation of business activities from one location to
another.
c. Change in management structure, such as elimination of a layer of management.
d. Fundamental reorganization of an entity that has a material and significant impact on its operations.

Future Operating Net Deficits - According to this rule, no provision should be recognized for expected net
deficits from future operating activities. Instead, if there's an expectation of future operating deficits, it
suggests that certain assets used in these activities may be impaired. In such cases, these assets need to be
tested for impairment, which means assessing whether their carrying amount exceeds their recoverable
amount. If the recoverable amount is less than the carrying amount, an impairment loss is recognized.

Onerous Contracts - An onerous contract is one where the unavoidable costs of meeting the obligations
under the contract exceed the economic benefits expected to be received from it. In other words, the
contract becomes burdensome for the entity. In such cases, the obligation under the onerous contract is
recognized as a provision. This provision reflects the estimated future costs that the entity will incur to
fulfill its obligations under the contract.

Restructuring - Restructuring refers to a program planned and controlled by management, which

significantly changes either the scope of an entity's activities or the manner in which those activities are
carried out. A legal obligation to restructure exists if, at the reporting date, the entity has entered into a
binding agreement to sell or transfer an operation. On the other hand, a constructive obligation to
restructure exists if, at the reporting date, there is both a detailed formal plan for the restructuring and the
plan is announced to those affected by it. A restructuring provision includes only the direct costs resulting
from the restructuring, such as severance payments, lease termination costs, and other directly related
expenses. It does not include costs associated with ongoing activities, retraining or relocating continuing
staff, marketing, or investment in new systems and distribution networks.

Restructuring

Examples of events that may qualify as restructuring include:

a. Sale or termination of a line of business.
b. Closure of business location in a region or relocation of business activities from one location to
another.
c. Change in management structure, such as elimination of a layer of management.
d. Fundamental reorganization of an entity that has a material and significant impact on its operations.