Determine whether the bank guarantee meets the definition of a provision or a contingent liability?Goldilocks signed an agreement with Bank Sweet to the effect that Goldilocks would guarantee a loan made by Banco Filipino to Goldilocks' subsidiary, Becky's. Becky's loan with Banco Filipino was 3,200,000Php as at June 30,2008. Becky's was in a strong financial position at June 30,2008. Determine... |
Answer:
This would fell under contigency only.
By definition given by the PAS, a provision is a liability of uncertain timing or amount.
A provision should be recognised when, and only when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable (ie more likely than not) that an outflow of resources embodying
economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. The Standard notes that it is only in extremely rare cases that a reliable estimate will not be possible.
A contingent liability is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
Source: Philippine Accounting Standard
