Question

Which of the following is a correct statement in relation to provisions and contingencies?

A. An item of a contingent nature may be recognised, but not disclosed, in the body of the financial statements.
B. The ability to reliably estimate the amount of a present obligation can be the difference between recognising a provision and disclosing a contingent liability.
C. IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies to contingent liabilities and contingent assets of insurers that result from insurance contracts.
D. A present obligation exists in all circumstances where a company may have some choice in whether or not to make a future sacrifice of economic benefits in settlement of an obligation.

Answer 1

The correct statement about provisions and contingencies is the one highlighting the importance of the ability to reliably estimate the amount of a present obligation, which affects whether it's recognized as a provision or disclosed as a contingent liability.

Step-by-step explanation:

The correct statement in relation to provisions and contingencies is: B. The ability to reliably estimate the amount of a present obligation can be the difference between recognising a provision and disclosing a contingent liability.

Provisions are recognized on the balance sheet when a business has a present obligation from a past event, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. If any of these conditions are not met, the potential obligation is considered a contingent liability and is disclosed in the notes to the financial statements, as required by IAS 37, but not recognized in the balance sheet.

On the other hand, contingent assets are not recognized on financial statements but can be disclosed if inflows of economic benefits are probable. It is important to disclose both contingent liabilities and assets to provide a complete picture of a company's financial position and potential obligations or receivables.