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Under IFRS, a provision (an estimated liability of uncertain timing or amount) is recognised only when which set of conditions is met?
AA possible obligation exists but settlement of it is only remotely likely
BManagement has drafted a budget and the board has formally signed off
CCash has already been paid out and the supplier has issued a receipt
DA present obligation exists, an outflow is probable, and a reliable estimate can be made
Answer & Solution
Correct answer: D. A present obligation exists, an outflow is probable, and a reliable estimate can be made
1. A provision is recognised only when three criteria are all satisfied.
2. First, there must be a present obligation arising from a past event.
3. Second, an outflow of economic resources to settle it must be probable.
4. Third, the amount must be capable of a reliable estimate.
5. A merely possible or remote obligation (option A) is a contingent liability, not a recognised provision; options B and C describe unrelated events.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.0 "Liabilities in More Detail", p.208_