A provision under IAS 37 is measured at the amount that represents management's:
Correct answer: B. Best estimate of the expenditure required to settle it
- A. Original purchase cost of the related asset
- B. Best estimate of the expenditure required to settle it
- C. Maximum possible loss in every case
- D. Expected profit from avoiding the obligation
Explanation
The measurement of a provision is based on the best estimate of the expenditure needed to settle the present obligation at the reporting date. It is not automatically the maximum possible loss. When the effect of time value is material, the amount may also be discounted.
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About Accruals, Prepayments and Provisions
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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