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F2: Advanced Financial Reporting

CHAPTER 8 – PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS

8.1 D

Uncertain assets are recognised when virtually certain. Provisions are
recognised when probable. A is incorrect.

Provisions can only be recognised if an obligation exists. These obligations
CAN be legal obligations but constructive obligations (borne out of past practice
rather than legal requirements) can also lead to provisions being recognised.
Therefore, B is incorrect.

Provisions should only be recorded if capable of reliable measurement. IAS 37
states that best estimates can be used to measure the value of provisions.
Therefore C is incorrect.

8.2 C

Uncertain liabilities

 Provisions should be recorded if an obligation exists, with a probable
chance of transfer of economic benefit that can be measured reliably.

 If the chances of a liability being paid are possible, it should be disclosed
as a contingent liability.

Uncertain assets

 Uncertain assets are recognised only if virtually certain

 If the uncertain asset is probable, it should be disclosed in the financial
statements.

The legal action against AP is an uncertain liability. As it is probable, AP should
make a provision.

The legal action taken by AP is a contingent asset as the chances of receiving
the claim are probable. It should be disclosed in a note.

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