Provisions and events after the reporting period

Question 1

what is a liability

Answer 1

a deduction from current year profits for a liability arising from past events that will be paid for in the future

Question 2

why are provisions required

Answer 2

accruals accounting

expenses should be recognised when they occur not when they are paid for

Question 3

what accounting standard deals with provisions

Answer 3

IAS 37 Provisions, contingent liabilities and contingent assets

Question 4

how does a provision and a liability differ

Answer 4

provisions are liabilities with a degree of uncertainty either about timing or amount

Question 5

what are the two types of obligations

Answer 5

legal (required by law)
constructive (created an expectation with other people from past actions)

Question 6

example of constructive obligation

Answer 6

Known store policy for refunding dissatisfied customers

Question 7

What 3 criteria need to be met for provision to be recognised

Answer 7

1. present obligation as a result of past event
2. probable outflow of resources required to settle the obligation (>50%)
3. reliable estimate of the amount

Question 8

How are provisions measured

Answer 8

discounted where effect is material

expected value/range of possible outcomes

Question 9

what are the conditions to recognise a restructuring provision

Answer 9

• present obligation
• direct costs related back to restructure

Question 10

examples of a present obligations for restructuring provisions

Answer 10

plan published outlining
- business effected
- employees effected
- expenditures that will be undertaken
- timing of implementation

(plan raises expectations of those effected)

Question 11

what costs qualify as restructuring provision costs

Answer 11

directly and necessarily caused by restructuring, not associated with ongoing operations

redundancy costs
dismantling costs
terminating leases cost

Question 12

examples of costs excluded from being allowable for restructuring provisions

Answer 12

employee retraining and relocation (benefits ongoing business)

marketing costs

Question 13

what is the criteria for a reimbursement to be recognised

Answer 13

virtually certain that it will be received

Question 14

what is an onerous contract

Answer 14

a contract with unavoidable costs that exceed the economic benefits expected to be received

e.g. lease remaining on building, but moving office

Question 15

to what value are provisions for onerous contracts recognised

Answer 15

the amount recognised will be the amount it would cost to continue paying going forward

Question 16

why are onerous contracts allowable to be recognised as provisions

Answer 16

• present obligation as result of past event
• probable outflow of resources
• reliable estimate of amount

Question 17

when should provisions be reviewed

Answer 17

at the end of each reporting period and adjusted if necessary

Question 18

what does it mean to reverse a provision

Answer 18

they transfer of resources will no longer be provided to settle the provision

Question 19

what is a contingent liability

Answer 19

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

Question 20

Example of a contingent liability

Answer 20

legal case - uncertain how it will pay out

Question 21

what is the accounting treatment for contingent liabilities

Answer 21

should not be recognised in financial statements

should be disclosed in notes
- brief description
- estimate of financial effects
- indication of uncertainties

Question 22

what is a contingent asset

Answer 22

possible asset arising from past events whose existence depends on an UNCERTAIN future event

Question 23

what is the accounting treatment of a contingent asset

Answer 23

PRUDENT
DO NOT RECOGNISE

Probable (>50%) = disclose in notes

Not Probable (<50%) = no note

Question 24

what disclosures are required under ias 37

Answer 24

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)

Question 25

what accounting standard deals with events after the reporting period

Answer 25

IAS 10 Events are the reporting period

Question 26

what time frame does IAS 10 refer to

Answer 26

between end of period and date of issue of financial statements

Question 27

what are the two types of events under ias 10

Answer 27

adjusting event
non adjusting event

Question 28

what is an adjusting event

Answer 28

financial statements must be changed to reflect this event

Question 29

examples of adjusting events

Answer 29

• 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

Question 30

how to deal with non adjusting events

Answer 30

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

Question 31

examples of non adjusting events

Answer 31

• 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

Question 32

Describe the historical problems regarding provisions that prompted the introduction
of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Answer 32

• 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.

Question 33

How would you represent this in financial statements:

A court case lost but unsure of amount of damages due yet

Answer 33

Contingent liability
=> unsure about amount

Question 34

How would you represent this in financial statements:

Owing a supplier €50000 for services carried out during the reporting period

Answer 34

Liability

certain about timing and amount

Question 35

How would you represent this in financial statements:

Expected costs to relocate an employee in the next financial period

Answer 35

Future cost
=> no change

Question 36

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.

Answer 36

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

Question 37

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.

Answer 37

No present obligation as not announced or acted upon. This decision could be reversed

=> No provisions

Question 38

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.

Answer 38

Constructive obligation as plans communicated to employees

Probable as detailed plan prepared

Reliable estimate of €550k redundancy

=> Provision of €550,000

Question 39

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

Answer 39

€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

Question 40

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.

Answer 40

Future cost

No present obligation/expectation
Could sell on fleet, could not get them serviced

=> No provision

Question 41

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

Answer 41

adjusting

will affect the value of the inventories shown in the financial statement

Question 42

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

Answer 42

non adjusting

Disclose by way of note

Question 43

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.

Answer 43

non adjusting

Disclose by way of note

Question 44

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

Answer 44

adjusting

write off as bad debt

Question 45

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

Answer 45

non adjusting

Disclose by way of note

Question 46

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.

Answer 46

adjusting

reduce cash figure in the financial statements

Question 47

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.

Answer 47

non adjusting

disclose by way of note

Question 48

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.

Answer 48

non adjusting

disclose by way of note