C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - PROVISIONS< CONTINGENCIES< EVENTS

Question 1

Provision (IAS 37)

Answer 1

Provision (IAS 37) is a liability of uncertain timing or amount.

Question 2

Provision recognition

Answer 2

Recognition. A provision is recognized when:
 The entity has a present obligation (legal or constructive) as a result of a past event.
 It is probable (>50%) that an outflow of resources embodying economic benefits will be required to settle the obligation.
 A reliable estimate can be made of the amount of the provision.

Question 3

Provision measurement

Answer 3

Measurement. The amount recognised is the best estimate of the expenditure required to settle the obligation at the end of the reporting period. The following guidelines apply to measuring a provision:
 Where a single obligation is being measured, the individual most likely outcome may be the best estimate.
 Where the provision being measured involves a large population of items use expected values.

Question 4

Provision discounting

Answer 4

Discounting. Where the provision will not be settled for some years and so the effect of the time value of money is material, the provision is discounted. The discount rate used should be the pre-tax market rate and appropriately reflect the risk associated with the cash flows. The unwinding of the discount is recognized in profit or loss.

Question 5

Provision reimbursement

Answer 5

Reimbursements. Where some or all of the costs to settle the provision will be reimbursed by another party (insurer), the reimbursement should only be recognised when it is virtually certain that the reimbursement will be received if the entity settles the obligation.

Question 6

Recognizing an asset when creating provision.

Answer 6

Recognizing an asset when creating provision. An asset can only be recognized where the present obligation recognized as a provision gives access to future economic benefits (decommissioning costs could be IAS 16 component).

Question 7

Provision derecognition

Answer 7

Derecognition. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed.

Question 8

Future operating losses - provisions

Answer 8

Future operating losses. Provisions are not recognized for future operating losses. They do not meet the definition of a liability and the general recognition criteria set out in the standard.

Question 9

Onerous contracts - provision

Answer 9

Onerous contracts. An onerous contract is a contract in which unavoidable costs of completing the contract exceed the benefits expected to be received under it. Unavoidable costs of meeting an obligation are the lower of costs of fulfilling the contract and penalties from failure to fulfil the contract. If an entity has a contract that is onerous the present obligation under the contract must be recognized and measured as a provision.
A lease agreement that becomes onerous is only within the scope of IAS 37, and therefore results in the creation of a provision, if simplified accounting is applied, so that no lease liability has been recognized. This is only the case where a lease is short-term or for and asset with a low value.

Question 10

Restructuring

Answer 10

Restructuring. It is a programme that is planned and is controlled by management and materially changes either the scope of a business undertaken by an entity, or the manner in which that business is conducted. Examples of restructuring include:
 The sale or termination of a line of business
 The closure of business locations or the relocation of business activities
 Changes in management structure
 Fundamental reorganizations that have a material effect on the nature and focus of the entity’s operations.

Question 11

Restructuring provision

Answer 11

A provision for restructuring is recognized only when the entity has a constructive obligation to restructure. Such obligation only arises where an entity:
 Has a detailed formal plan exists for the restructuring, and
 Has raised a valid expectation in those affected that it will carry out restructuring by starting to implement that plan or announcing its main features to those affected by it.
Where the restructuring involves the sale of operation, no obligation arises until the entity has entered into a binding sale agreement.
A restructuring provision includes only the direct expenditures arising from the restructuring, which are those that are both:
 Necessarily entailed by the restructuring; and
 Not associated with the ongoing activities of the entity
The provision should not include:
 Retraining or relocating continuing staff
 Marketing
 Investment in new systems and distribution networks

Question 12

Environmental provision.

Answer 12

Environmental provision. When an entity has an obligation to clean up environmental damage, it normally has to recognise a provision for expenditure which will take place many years in the future. The estimated full cost of the expenditure should be recognised as soon as an obligation arises. However, the provision is discounted to its net present value if the time cost of money is material. As well as recognising a liability for future expenditure, an entity normally recognises an asset. The double entry is Dr Asset; Cr Provision

Question 13

Contingent liabilities (IAS 37).

Answer 13

Contingent liabilities (IAS 37). A contingent liability is either:
 A possible obligation arising from past events 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.
 A present obligation that arises from past events but is not recognised because:
o It is not probable that an outflow of economic benefits will be required to settle the obligation; or
o The amount of the obligation cannot be measured with sufficient reliability

Question 14

Contingent liabilities recognition and disclosure

Answer 14

Contingent liabilities should not be recognized in financial statements but should be disclosed unless the possibility of an outflow of economic benefits is remote.
For each class of contingent liability, an entity must disclose the following:
 The nature of the contingent liability
 An estimate of its financial effect
 An indication of the uncertainties relating to the amount or timing of any outflow
 The possibility of any reimbursement

Question 15

Contingent assets (IAS 37).

Answer 15

Contingent assets (IAS 37). A contingent asset is a possible asset 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.
A contingent asset should not be recognized but should be disclosed where an inflow of economic benefits is probable. A brief description of the contingent asset should be provided along with an estimate of its likely financial effect.

Question 16

Events after the reporting period (IAS 10)

Answer 16

Events after the reporting period (IAS 10) are those events, both favourable and unfavourable, that occur between the year end and the date on which the financial statements are authorized for issue

Question 17

There are two types of event after the reporting period:

Answer 17

There are two types of event after the reporting period:
 Adjusting events. These are events that provide evidence of conditions that already existed at end of the reporting period.
o An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.
o Examples:
 Settlement of court case
 Bankruptcy of customer
 Sale of inventory at below cost
 Determination of purchase/sale price of PPE
 Non-adjusting events. These are events indicative of conditions that arose after the end of the reporting period.
o An entity shall not adjust the amounts recognised in the financial statements to reflect non-adjusting events after the reporting period, but are disclosed.
o Examples:
 Fall in value of investments
 Major purchase of assets
 Announcing a discontinued operation
 Announcing a restructuring

Question 18

Events after reporting period disclosure

Answer 18

Disclosure. An entity discloses the date when the financial statements were authorized for issue and who gave the authorization. If non-adjusting events after the reporting period are material, non-disclosure could influence the decision of users taken on the basis of the financial statements. Accordingly, the following is disclosed for each material category of non-adjusting event after reporting [period:
 The nature of the event, and
 An estimate of its financial effect, or a statement that such an estimate cannot be made.