22420 Chap.7 Provisions, Contingent Liabilities and Employee Benefits
Provisions, Contingent Liabilities and Employee Benefits
Provisions and contingencies
Under AASB 137 a provision is a present obligation, legal or constructive, of uncertain amount or timing, measured at the best estimate and discounted at a pre-tax rate where the effect is material.
Where an outflow is not probable or cannot be reliably measured, the obligation is disclosed as a contingent liability instead.
Employee benefits
AASB 119 treats annual and sick leave as paid absences. Accumulating leave builds a liability as staff work, vesting leave is expected to be paid in full, and annual leave accruals include any leave loading.
Long service leave is measured by the projected unit credit approach.
The end of the midsemester coverage
This module is the last topic examined in the in-person midsemester exam, so the classification questions here are typical multiple-choice material: one present obligation test, one probability test and one measurement test, applied to short facts.
What this chapter covers
- 01
Present obligations: legal and constructive
- 02
Liability, provision, contingent liability or nothing
- 03
Best estimate and discounting a provision
- 04
When a contingent liability becomes a provision
- 05
Paid absences: accumulating and non-accumulating
- 06
Vesting and non-vesting sick leave
- 07
Annual leave accrual with leave loading
- 08
Long service leave by projected unit credit
Worked example · free
Accruing annual leave with a 17.5% loading
- 1Closing days: R 6 + 20 − 14 = 12; S 3 + 20 − 15 = 8; T 10 + 20 − 25 = 5.
- 1Without loading: $3,840 + $2,080 + $2,000 = $7,920.
- 1With the 117.5% factor: R $4,512, S $2,444 and T $2,350.
Key terms
- Provision
- A liability of uncertain timing or amount.
- Constructive obligation
- An obligation created by an established pattern of past practice or a public commitment that leaves no realistic alternative.
- Contingent liability
- An obligation that is disclosed rather than recognised because an outflow is not probable or cannot be measured reliably.
- Vesting leave
- Leave the employee is entitled to receive in cash if it is not taken.
- Leave loading
- An extra percentage of the normal wage paid while an employee takes annual leave.
Provisions, Contingent Liabilities and Employee Benefits FAQ
Can a company provide for a planned overhaul?
No. A planned overhaul is a future cost with no present obligation, because the company could sell the asset or decide not to repair it. Intentions are not obligations.
Should provisions be discounted?
Yes, where the effect of discounting is material, using a pre-tax rate reflecting the time value of money and the liability’s specific risks; if the cash flows already allow for risk, the rate must not count it again.
Is a liability recognised for non-accumulating sick leave?
No. Unused non-accumulating leave lapses at year end, so the expense is simply the paid leave taken during the year and no liability is carried forward for unused days.
What is the difference between accumulating and vesting leave?
Accumulating leave can be carried forward if unused, so a liability builds as employees work. Vesting leave is paid out in cash if unused, so all of it is expected to be paid; for non-vesting leave only the portion expected to be taken is recognised.
How is long service leave measured?
AASB 119 uses the projected unit credit approach. The self-study exercise estimates, for each group of employees, the probability of becoming entitled, projected salaries and years until vesting, then discounts the expected payments using corporate bond yields to measure the provision.
Exam move
Practise the three-question decision path until you can classify any item in under a minute, always naming the deciding fact. Then rehearse an annual leave accrual with loading, a non-accumulating sick leave calculation and one discounted provision with its first year of unwinding interest. Since this topic ends the midsemester coverage, finish with ten quick classification questions under time pressure.
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