- 5 Marks
Question
The definition of a liability forms an important element of the International Accounting
Standards Board’s Framework for the Preparation and Presentation of Financial Statements
which, in turn, forms the basis for IAS 37: Provisions, Contingent Liabilities and Contingent
Assets.
Required
Define liability and describe the circumstances under which provisions should be recognized.
Answer
A liability is a present obligation of the entity to transfer an economic resource as a result of past events. Previously, a liability was defined as a present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of economic benefits (normally cash).
Provisions are defined as liabilities of uncertain timing or amount, i.e., they are normally estimates. A provision should be recognized as a liability in the financial statements when:
- An enterprise has a present obligation (legal or constructive) as a result of a past event.
- It is probable that a transfer of economic benefits will be required to settle the obligation.
- A reliable estimate can be made of the obligation.
- Tags: Contingent Assets, Contingent Liabilities, Financial Reporting, IAS 37, IFRS Standards, Provisions
- Level: Level 2
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