Q: Which formula should be used to calculate the present value of a future obligation under IAS 37?

$$PV = FV \times (1 + i$$)^{-n}$$

Question 1

Which of the following best describes a 'provision' under IAS 37?

Accepted Answer

A liability of uncertain timing or amount.

Question 2

Which of the following is NOT a condition for the recognition of a provision under IAS 37?

Accepted Answer

The obligation is expected to be settled within the next financial year.

Question 3

A company is being sued for damages. Its legal advisors believe it is probable the company will NOT be found liable. How should this be treated under IAS 37?

Accepted Answer

No provision is recognised; a contingent liability is disclosed.

Question 4

Which of the following best describes a 'contingent liability' under IAS 37?

Accepted Answer

A possible obligation that arises from past events and whose existence will be confirmed only by uncertain future events.

Question 5

A company has a policy of refunding dissatisfied customers, even though it is not legally required to do so. This creates:

Accepted Answer

A constructive obligation.

Question 6

Which of the following is TRUE regarding the measurement of provisions under IAS 37?

Accepted Answer

The provision is measured at the best estimate of the expenditure required to settle the present obligation at the reporting date.

Question 7

If the effect of the time value of money is material, how should a provision be measured?

Accepted Answer

At the present value of the expected expenditure.

Question 8

Which formula should be used to calculate the present value of a future obligation under IAS 37?

Accepted Answer

$$PV = FV 	imes (1 + i$$)^{-n}$$

Question 9

A company expects to be reimbursed for part of a provision by another party. When should the reimbursement be recognised as an asset?

Accepted Answer

When it is virtually certain that reimbursement will be received if the entity settles the obligation.

Question 10

Which of the following is NOT a required disclosure for provisions under IAS 37?

Accepted Answer

The names of the parties involved in the obligation.

Question 11

A company has a contract that will result in unavoidable costs exceeding the economic benefits to be received. According to IAS 37, this contract is:

Accepted Answer

An onerous contract.

Question 12

Which of the following is TRUE regarding contingent assets under IAS 37?

Accepted Answer

They are only disclosed when an inflow of economic benefits is probable.

Question 13

Which of the following is NOT an example of a provision under IAS 37?

Accepted Answer

A liability for future operating losses.

Question 14

A company has a present obligation as a result of a past event, but the amount cannot be measured reliably. According to IAS 37, the company should:

Accepted Answer

Disclose a contingent liability.

Question 15

Which of the following statements about the distinction between provisions and contingent liabilities is correct?

Accepted Answer

A provision is recognised when an outflow is probable and can be measured reliably, while a contingent liability is disclosed when an outflow is not probable or cannot be measured reliably.

Question 16

Which of the following is a key objective of IAS 37?

Accepted Answer

To ensure proper recognition, measurement, and disclosure of provisions, contingent liabilities, and contingent assets.

Question 17

A company has a legal obligation to clean up environmental damage caused by its operations. The cost is reliably estimated and it is probable that an outflow will be required. What should the company do under IAS 37?

Accepted Answer

Recognise a provision for the clean-up costs.

Question 18

Which of the following is TRUE regarding the expected disposal of assets when measuring a provision?

Accepted Answer

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

Question 19

Which of the following best describes a 'constructive obligation' under IAS 37?

Accepted Answer

An obligation that derives from an entity's actions, such as established patterns of past practice or published policies, creating a valid expectation in other parties.

Question 20

A company has a present obligation, it is probable that an outflow will be required, but the amount cannot be measured reliably. According to IAS 37, what should the company do?

Accepted Answer

Disclose a contingent liability.

IAS 37: Provisions, Contingent Liabilities, and Contingent Assets – Mini-Textbook Study Notes

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