Provisions and events after the reporting period Flashcards
what is a liability
a deduction from current year profits for a liability arising from past events that will be paid for in the future
why are provisions required
accruals accounting
expenses should be recognised when they occur not when they are paid for
what accounting standard deals with provisions
IAS 37 Provisions, contingent liabilities and contingent assets
how does a provision and a liability differ
provisions are liabilities with a degree of uncertainty either about timing or amount
what are the two types of obligations
legal (required by law)
constructive (created an expectation with other people from past actions)
example of constructive obligation
Known store policy for refunding dissatisfied customers
What 3 criteria need to be met for provision to be recognised
- present obligation as a result of past event
- probable outflow of resources required to settle the obligation (>50%)
- reliable estimate of the amount
How are provisions measured
discounted where effect is material
expected value/range of possible outcomes
what are the conditions to recognise a restructuring provision
- present obligation
- direct costs related back to restructure
examples of a present obligations for restructuring provisions
plan published outlining
- business effected
- employees effected
- expenditures that will be undertaken
- timing of implementation
(plan raises expectations of those effected)
what costs qualify as restructuring provision costs
directly and necessarily caused by restructuring, not associated with ongoing operations
redundancy costs
dismantling costs
terminating leases cost
examples of costs excluded from being allowable for restructuring provisions
employee retraining and relocation (benefits ongoing business)
marketing costs
what is the criteria for a reimbursement to be recognised
virtually certain that it will be received
what is an onerous contract
a contract with unavoidable costs that exceed the economic benefits expected to be received
e.g. lease remaining on building, but moving office
to what value are provisions for onerous contracts recognised
the amount recognised will be the amount it would cost to continue paying going forward
why are onerous contracts allowable to be recognised as provisions
- present obligation as result of past event
- probable outflow of resources
- reliable estimate of amount
when should provisions be reviewed
at the end of each reporting period and adjusted if necessary
what does it mean to reverse a provision
they transfer of resources will no longer be provided to settle the provision
what is a contingent liability
a POSSIBLE obligation arising from past events, whose existence depends on UNCERTAIN future event
OR
a present obligation arising from past events that is uncertain how much will be required to settle the obligation
Example of a contingent liability
legal case - uncertain how it will pay out
what is the accounting treatment for contingent liabilities
should not be recognised in financial statements
should be disclosed in notes
- brief description
- estimate of financial effects
- indication of uncertainties
what is a contingent asset
possible asset arising from past events whose existence depends on an UNCERTAIN future event
what is the accounting treatment of a contingent asset
PRUDENT
DO NOT RECOGNISE
Probable (>50%) = disclose in notes
Not Probable (<50%) = no note
what disclosures are required under ias 37
carrying amount at beginning and end of period
how provision increased or decreased throughout the period
brief description (expected timing and indication of uncertainties involved)
what accounting standard deals with events after the reporting period
IAS 10 Events are the reporting period
what time frame does IAS 10 refer to
between end of period and date of issue of financial statements
what are the two types of events under ias 10
adjusting event
non adjusting event
what is an adjusting event
financial statements must be changed to reflect this event
examples of adjusting events
- impairment after year end
- debtor has declared bankrupt after year end
- inventory fallen in value
- Subsequent determination of the purchase price of an asset purchased before the year end
- Errors/fraud
how to deal with non adjusting events
if it is material it should be disclosed by way of note
include nature of event and estimated financial effect
ensures that financial statements are not misleading
examples of non adjusting events
- closing a large part of activity not anticipated at year end
- buying and selling assets after year end
- fire/flood/damages after year end
- declaration of dividend after year end even if it relates to the financial period
Describe the historical problems regarding provisions that prompted the introduction
of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
- Lack of consistency in accounting treatment
- Entities to profit-smooth i.e. reporting excessive liabilities at the outset, and boosting profit
in subsequent years. - Use of provisions that are intentions rather than obligations.
- Lack of detailed disclosure about provisions, making the accounts less useful.
How would you represent this in financial statements:
A court case lost but unsure of amount of damages due yet
Contingent liability
=> unsure about amount
How would you represent this in financial statements:
Owing a supplier €50000 for services carried out during the reporting period
Liability
certain about timing and amount
How would you represent this in financial statements:
Expected costs to relocate an employee in the next financial period
Future cost
=> no change
How would you represent this in financial statements:
Wants to create a provision for a renovation required every 5 years. The machine in question is now 5 years old.
no present obligation
it is the first time renovation is required, if the machine was 15 years old and had be renovated x3 there would be an expectation
they could easily sell or not renovate the machine
Financial year end = 31 March 2014
Should a provision be recognised?
On 18 February 2014, the board of directors decided to close down one of the
company’s operations. As at 31 March 2014, this decision had not been announced
or acted upon. The closure would involve redundancy payments of €400,000.
No present obligation as not announced or acted upon. This decision could be reversed
=> No provisions
Financial year end = 31 March 2014
Should a provision be recognised?
On 11 March 2014, the board of directors decided to close down one another of
the company’s operations. By 31 March 2014, this decision had been announced
to the employees, and a detailed implementation plan had been prepared. The
closure would involve redundancy payments of €550,000.
Constructive obligation as plans communicated to employees
Probable as detailed plan prepared
Reliable estimate of €550k redundancy
=> Provision of €550,000
Financial year end = 31 March 2014
Should a provision be recognised?
Recently, the company has been conducting two operations which cause
environmental damage. One of these is in a country with legislation which requires
companies to rectify any environmental damage they cause. The other is in a
country with no such legislation. The costs of rectifying the damage caused to date
by these two operations are estimated at €6 million and €8 million respectively
€6m
Legal obligation
Probable + reliable estimate
=> Provision €6 million
€8m
No legal obligation but a constructive one based on company’s behaviour and paying the other one
Probable + reliable estimate
=> Provision €8 million
Financial year end = 31 March 2014
Should a provision be recognised?`
At 31 March 2014, the company owns a fleet of motor vehicles, all of which require
an annual service. This servicing work is expected to occur in the first few months
of the year to 31 March 2015, at an estimated cost of €80,000.
Future cost
No present obligation/expectation
Could sell on fleet, could not get them serviced
=> No provision
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
a) Inventory held at 31 December 2014 was sold to a customer
adjusting
will affect the value of the inventories shown in the financial statement
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
b) We made a major investment in plant and equipment
non adjusting
Disclose by way of note
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
We made a take-over bid for another company.
non adjusting
Disclose by way of note
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
A customer who owed an amount of money to us on 31st December 2014 was
declared bankrupt
adjusting
write off as bad debt
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
We announced a major restructuring plan
non adjusting
Disclose by way of note
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
It was discovered that cash shown as an asset in the statement of financial position at
31 December 2014 had been stolen on 28 December 2014.
adjusting
reduce cash figure in the financial statements
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
It was discovered that an item of equipment shown as an asset in the statement of
financial position at 31 December 2014 had been stolen on 12 January 2015.
non adjusting
disclose by way of note
Financial year end = 31 December 2014
Event occurred after year end, before the financial statements were authorised for issue
Is the event adjusting or non-adjusting?
The government announced a change in tax rates that will have a significant effect on
the company’s tax liability at 31 December 2014.
non adjusting
disclose by way of note
