Question 1

A necessary condition to recognise a present obligation in the financial statements is that the identity of the party to whom the present obligation is owed must be known.

Accepted Answer

A present obligation can be recognized in the financial statements even if the identity of the party to whom the obligation is owed is not known, as long as there is a present obligation that will likely result in an outflow of resources.

Question 2

The defining characteristic of a "provision" as opposed to other liabilities is that the existence of an obligation is uncertain:

Accepted Answer

False

Question 3

Some researchers have found that firms can benefit from being in financial distress:

Accepted Answer

According to some researchers, financial distress can serve as a catalyst for firms to make necessary changes and improvements, such as cutting costs and reallocating resources, which can ultimately lead to increased profitability and competitiveness. However, this outcome is not guaranteed and depends on the specific circumstances of each firm.

Question 4

Executory contracts are within the scope of AASB 137 "Provisions,Contingent Liabilities and Contingent Assets".

Accepted Answer

Executory contracts are not within the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets, as this standard specifically excludes executory contracts unless they are onerous.

Question 5

In AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",there is symmetry in the treatment of contingent liabilities and contingent assets where both are required to be disclosed when the contingent event is probable to occur.

Accepted Answer

In AASB 137, there is an asymmetry in the treatment of contingent liabilities and contingent assets. Contingent liabilities are required to be disclosed if the outflow of resources embodying economic benefits is more than remote, whereas contingent assets are not recognized in financial statements but are disclosed only when the inflow of economic benefits is probable.

Question 6

The market will only pay a premium for debentures if the par value of those debentures is lower than the market interest rate:

Accepted Answer

The market will pay a premium for debentures if the interest rate on those debentures is lower than the market interest rate. This is because investors are willing to pay more for a lower interest rate as it provides them with a better return on their investment. Conversely, if the interest rate on the debentures is higher than the market rate, investors will only purchase them at a discount.

Question 7

What is the treatment of contingent liabilities in the financial statements?
A) Contingent liabilities are to be recognised as a separate category in the balance sheet, with clear note disclosure of the factors that constitute the contingent event for each material contingent liability.
B) Contingent liabilities are required to be disclosed in the notes to the accounts only when they are individually material and categories are required to be disclosed only when the category is material.
C) Material contingent liabilities only are required to be recognised in the financial statements under AASB 137.
D) Contingent liabilities are to be disclosed in the notes to the accounts in categories that reflect their nature and possible timing.
E) None of the given answers.

Accepted Answer

The answer of What is the treatment of contingent liabilities...

Question 8

A guarantee provided to a financier for a loan taken out by another entity,where default on that loan is uncertain as at the reporting date,is an example of a contingent liability:

Accepted Answer

A guarantee provided for a loan taken out by another entity is a contingent liability as there is uncertainty about whether the borrower will default on the loan.

Question 9

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",a contingent liability must be disclosed in the financial statement even when the likelihood of a present obligation occurring in future is remote.

Accepted Answer

According to AASB 137, a contingent liability is not recognized in the financial statements; it is disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.

Question 10

In a constructive obligation where the entity retains discretion to avoid any future sacrifice of economic benefits,no liability should be recognised in the financial statements.

Accepted Answer

A constructive obligation is one where there is no legal obligation, but the entity is expected to act in a certain way due to its past actions or statements. However, if the entity retains discretion to avoid any future sacrifice of economic benefits, then no liability should be recognized in the financial statements as there is no obligation to do so.

Question 11

When determining whether a liability exists,the intentions or actions of management need to be taken into account:

Accepted Answer

The intentions or actions of management can help determine whether a liability exists, as it may impact whether an obligation exists or can be settled, or if a certain event is probable or not.

Question 12

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets" some present obligations are allowed to be disclosed in the notes to the financial statements.

Accepted Answer

AASB 137 allows for the disclosure of certain present obligations in the notes to the financial statements. These may include contingencies or uncertainties, such as pending lawsuits or environmental liabilities, that do not meet the criteria for recognition as provisions. However, the notes must provide sufficient information to enable users to understand the nature, timing and amount of the obligations, and the likelihood of their occurrence.

Question 13

The present obligation component of a liability must be based on:
A) A legal obligation only.
B) A construction obligation, meaning there is an obligation to build something.
C) A social obligation.
D) A contractual obligation.
E) None of the given answers.

Accepted Answer

A present obligation can arise from legal, contractual, or constructive obligations, not just one specific type.

Question 14

Provisions are established to allow for future sacrifices such as repairs and maintenance of machinery and may be recognised as liabilities:

Accepted Answer

The answer of Provisions are established to allow for future...

Question 15

Entities are only required to record a liability if there has been a past transaction that has created a present obligation to another entity that is expected to result in an outflow of future economic benefits:

Accepted Answer

This statement accurately reflects the requirement of recording a liability in financial accounting. A liability is recognized when there is a past event or transaction that has resulted in a present obligation to another entity, and the outflow of future economic benefits is expected. Without these criteria being met, a liability should not be recognized.

Question 16

A necessary condition for a provision to be recognised is that there is a legal obligation to make a future sacrifice of economic benefits:

Accepted Answer

A provision can be recognized based on either a legal obligation or a constructive obligation, where a company has created a valid expectation that it will undertake certain responsibilities.

Question 17

A discount on debentures issued arises when the market required rate of return is less than the coupon rate:

Accepted Answer

A discount on debentures arises when the market required rate of return is more than the coupon rate. This means that investors are willing to pay less than the face value of the debentures because they can earn a higher return elsewhere.

Question 18

Under AASB 101 something may be classified as a current liability even when it is not expected to be settled for a period in excess of 12 months:

Accepted Answer

AASB 101 allows for certain items to be classified as current liabilities even if they are not expected to be settled within 12 months if they are part of the entity's normal operating cycle, such as trade payables.

Question 19

In terms of accounting treatment under AASB 132 debentures and bonds are the same thing:

Accepted Answer

Debentures and bonds are both considered debt instruments under AASB 132 and are accounted for in the same way.

Question 20

Convertible notes may be best described as having characteristics of both liabilities and bonds:

Accepted Answer

Convertible notes are best described as having characteristics of both debt and equity, not liabilities and bonds. They are a form of short-term debt that can convert into equity, typically at the discretion of the holder or upon certain events.

Quiz 10: An Overview of Accounting for Liabilities