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Financial reporting - Assignment Example
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Finance & Accounting
Pages 10 (2510 words)
The International Accounting Standard (IAS) sets out the accounting principles for Provisions, contingent assets and contingent liabilities. The main objective is to guarantee appropriate methodology for recognizing and measuring provisions of contingent liabilities and contingent assets. …
IAS 37 was issued in order to deal with the subjective area of provision and to prevent the use of ‘big bath provisioning’ and the practice of profit smoothing. IAS 37 requires that (in accordance with the definition of a liability) a provision should be made where the matter gives rise to a constructive or legal obligation and where there is a probability that there will be an outflow of economic benefits which can be reliably measured. In addition IAS 37 gives examples of how specific situations should be dealt in terms of recognition, measurement and disclosure depending on the circumstances. These include onerous contracts, re-organizations and restructuring costs, and environmental contamination. Evidence is required to support their classification and disclosure is appropriate under the standard. Provision by definition is a liability of uncertain amount and the timing is unknown. These obligations arise due to past events and transactions of which there settlements are believed to generate an inflow of resources to the business entity.
The term provision is frequently used in the accounting to describe the put aside write off the value of assets. They include; provision to put aside to be knocked off the value of obsolete inventory or value of the damaged property. This sum of amount is normally maintained for the purpose of meeting uncertain and random occurrence of loss or liability which is anticipated to happen in feature. It is however good to note that these anticipated losses and liabilities are estimates. For instance, if the current transactions indisputably result to some certain loss or liabilities of unknown value therefore provision should be made with regard to such losses in current year’s book. ...
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