Bill Ltd will have to pay for long service leave (LSL) for its employees when they become entitled to it in 5 years' time.The estimate of this future payment is a:
A)provision to be recognised when they become entitled to the LSL (when there is a legal obligation to pay the LSL)
B)a contingent liability to be recognised this year
C)a contingent liability to be recognised when they become entitled to the LSL
D)provision to be recognised this year

Question

Quizplus · Accepted Answer

A provision is recognized when a company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. In this case, the obligation for LSL arises because of the employees' service, making it a present obligation that will lead to future payments, thus a provision should be recognized this year.

Bill Ltd Will Have to Pay for Long Service Leave