Question

Under IFRS, a provision is the same as:

(a) a contingent liability (c) a contingent gain

(b) an estimated liability (d) None of the above

Short answer

The correct option is (b) an estimated liability.

Step-by-step solution

Meaning of Liability

A liability refers to an obligation for an individual or company to meet bank loans, the debt of creditors, and the accounts payable within a specified period.

Explanation for the correct option

An estimated liability is an obligation of an uncertain amount that can be reasonably estimated. In simple words, it is a known liability that exists, but the amount of liability is unknown. Management can only estimate the total amount of liability in this case.

Examples are warranty costs, pension costs, tax liabilities, and health care costs.

Therefore, an estimated liability is a correct answer.

Explanation for incorrect options

Option (a): A contingent liability is not an actual liability but an anticipated liability (probable liability which may or may not become payable). It depends upon the happening of certain events or the performance of certain acts. An element of uncertainty is always attached. A contingent liability, thus, may or may not become a sure liability. These liabilities are shown as a footnote under the balance sheet.

Option (c): A contingent gain is a likely increase in assets that have not yet taken place. However, a contingent gain is not recognized in the financial statements till the transaction is sorted out.

Option (d): The option ‘none of the above is incorrect as, under IFRS, the provision and an estimated liability are the same.

Hence, the options (a), (c) and (d) are incorrect.