Liabilities Flashcards
A machine will need repair in December 2014. Maintenance repair costs are expected to be CHF 10’000 (net). Maintenance will be undertaken in February 2015.
Does this kind of maintenance give rise to provisions?
Under IFS, it is not permitted to capitalize maintenance costs as provisions because
an entity has to have a present obligation as a result of a past event. In this case, a present obligation does not exist because the company can still avoid the maintenance by selling the machine.
In April 20.0, five people died because of taking a prescription drug from
company Vonartis. Relatives of those people who died have taken legal action against Vonartis. At the end of 20.0, it looked like Vonartis would not be made responsible for the death of those five people. In 20.1, however, the public attorney provided new evidences in court which make a conviction more likely. For Vonartis, it seems very likely that a compensation for the losses suffered have to be paid in the amount of CHF 3’000’000.
Does this circumstance give rise to provisions?
On 31 December 20.0: The probability for a conviction resp. a compensation for loss suffered is very low. As a result, Vonartis should not make any provisions.
On 31 December 20.1: The probability for a conviction resp. a compensation for loss suffered is much higher. As a result, Vonartis should make a provision in the amount of CHF 3’000’000.
A trading company runs several shops with highly fluctuating revenues. There is serious risk that some of the shops might be closed in the future because of costs exceeding revenues. The trading company records provisions of CHF 1M.
Are such provisions permitted under IFRS?
Such provisions are not permitted under IRS because they do not involve another party (lAS 37.20). Further, provisions shall not be recognized for future operating loss (IAS 37.63). There is also no detailed formal plan for a restructuring. (IAS 37.72)
BBD AG produces its products in a manufacturing plant in Bern which they lease (operating lease). At the end of 20.0, the company moves to another manufacturing plant in Zurich, which they also lease. However, the lease contract foresees a term for an additional four years. The contract cannot be dissolved prematurely. Further, BBD is not allowed to sub-lease the plant in Bern to a third party.
Is BBD AG allowed to show a provision at the end of 20.0 in their books?
BBD has a present obligation from a legal contract as a result of a past event. It is probable that an outflow of resources will be required to settle the obligation (lease payments for the next four years). A reliable estimate can be made on the basis of the lease contract. Such contracts are called “Onerous Contracts”
A trading company has a purchasing contract with its supplier for five years.
Soon, the contractually fixed purchase prices exceeds the market price.
Is the company allowed to show a provision for the purchasing contract in their books?
The company has a present obligation. The obligation results from a past event. It is probable that an outflow of resources will be required to settle the obligation. A reliable estimate can be made. Such contracts are called “Onerous Contracts”. A provision can be shown in the amount of a best estimate.
XZ AG has committed itself to repair all damages on their sold products which occur within five years after the selling date at their own expense. From past
experience, they know that repair costs amount on average 2% of revenue. XZ AG showed CHF 320’000 of warranty provisions on their balance sheet in 20.0. At the end of their fiscal year 20.1, XZ AG shows revenues of CHF 18’000’000 in profit and loss.
Which amount shows up under warranty provisions at the end of 20.1?
What’s the respective accounting record?
The amount under warranty provision is CHF360’000 (18’000’000*2%).
Accounting record:
20.1: Provision expenses / Warranty provisions 40’000
