Intermediate Accounting 2

Week 2 - Answer

Marks will be awarded with logical argumentation and appropriate presentation of the answers. Answer to question 1 1 Definition of liability: A present obligation arising from a past event, the settlement of which is expected to result in an outflow of resources embodying benefits (i.e. usually a cash payment) There are two types of event creating obligation a) Legal – arises from the conclusion of legal contract, legislation or other operation of law. Example: repair warranty in sales agreement Constructive – derives from the actions of the enterprise where: Past actions – by an established pattern of past practice, published policies or a sufficiently specific current statement, the enterprise has indicated to other parties that it will accept certain responsibilities; and Created valid expectations – as a result, the enterprise has created valid expectations on the part of those parties that it will discharge those responsibilities For example: manufacturer has repaired any faulty items free of charge though there is no warranty in the sales agreement 3. Provision is a liability of uncertain timing or amount. It is accrued on the statement of financial position as it is probable it will be settled and a reliable estimate can be made of the amount that will be settled. Application of the recognition and measurement rules Future operating losses Do not meet the definition of liability and no provision should be made. Onerous contracts Where certain rights and obligations make a contract onerous, a provision should be recognized for any unavoidable costs exceed the benefits expected.

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b)

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Intermediate Accounting 2
Restructuring plans

Week 2 - Answer

Recognition of the provision is required because a constructive obligation may arise from the decision to restructure when, and only when, an