IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Question 1

Recognition criteria

Answer 1

i) Probable (>50%) transfer of economic benefits
ii) Reliable estimate
iii) Present Obligation (legal or constructive)
- Raised a valid expectation in those affected
- Detailed formal plan approved by Board of Directors

Question 2

Example of Recognised

Answer 2

1. Decommissioning/abandonment costs
   - Carry within asset and amortise over useful life.
2. Environmental Contamination
3. Retrenchment
4. Onerous Contract

Question 3

Restructing costs

Answer 3

1. Planned (detailed formal plan) and Controlled by management
2. Approved by Board of Directors
3. Announced for those affected
4. Raised a valid expectation on those affected

Question 4

Onerous Contract

Answer 4

A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to receive under it

Question 5

How to value onerous contract

Answer 5

By determining the present value of the unavoidable costs, net of the expected benefits under the contract. The discount rate should be a pre-tax which reflects current market assessements of the time value of money and the risks specific to the liability

Question 6

Definition

Answer 6

IAS 37 states that a provision shall be recognized when there is present obligation which is either legal or constructive obligation arising.

Question 7

Can provision be avoided?

Answer 7

Yes, if company decided to sell the asset etc, hence this is not a present obligation and shall not be expensed off.

Question 8

Importance and significant factors that will affect the impairment test:

Answer 8

1. Changes in circumstances during reporting period. Eg Covid
2. Market Capitalization dropped below the carrying amount of net assets
3. Allocation of GW to CGUs may need to be reassess
4. Discount rate increases can affect impairtment (will increase)