ias 37 solutions pdf
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A quality informative document on IAS.TRANSCRIPT
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IAS37Provisions,contingentliabilitiesandcontingentassets
Solutions
VroniqueWeets
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IAS37Provisions,contingentliabilitiesandcontingentassetsSolutions
InstituutvandeBedrijfsrevisoren 227oktober2010
TABLE OF CONTENTTableofcontent......................................................................................................................................................2
Definitions...........................................................................................................................................................3
Measurement....................................................................................................................................................10
Bestestimate.................................................................................................................................................10
Discountrate.................................................................................................................................................11
Effectofreimbursements..............................................................................................................................12
Generalcases.................................................................................................................................................13
Onerouscontracts.............................................................................................................................................15
Restructurings...................................................................................................................................................18
Recognitionofarestructuringprovision.......................................................................................................18
Costofrestructuring......................................................................................................................................19
IFRIC1Changesinexistingdecommissioning,restorationandsimilarliabilities...........................................21
Financialguaranteecontracts...........................................................................................................................25
IFRIC13Customerloyaltyprogrammes.........................................................................................................26
ED2010/1MeasurementofliabilitiesinIAS37................................................................................................27
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 327oktober2010
DEFINITIONS
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 427oktober2010
1. Identifywhethereachofthefollowingwouldbealiability,aprovisionoracontingentliability,ornoneoftheabove,inthefinancialstatementsofcompanyAasatitsbalancedateof30June20X5.AssumethatcompanyAsfinancialstatementsareauthorizedforissueon24August20X5(Alfredsone.a.,pg190,exercise5.7)
a. Anamountof35000owingtocompanyZforservicesrenderedduringMay20X5.
Liability
b. Longserviceleave,estimatedtobe500000,owingtoemployeesinrespectofpastservices.
Provisionamountandtimingareuncertain
c. Costsof26000estimatedtobeincurredforrelocatingemployeeDfromcompanyAsheadofficelocationtoanothercity.ThestaffwillphysicallyrelocateduringJuly20X5.
Noprovisionorliabilitytheamountisafuturecost.
d. Provisionof50000fortheoverhaulofamachine.Theoverhaulisneededevery5yearsandthemachinewasfiveyearsoldasat30June20X5.
NoprovisionorliabilitynopresentobligationtooverhaulthemachineCompanyAcoulddecidetosellthemachineornotrepairit.
e. DamagesawardedagainstCompanyAresultingfromacourtcasedecidedon26June20X5.Thejudgehasannouncedthattheamountofdamageswillbesetatafuturedate,expectedtobeinSeptember20X5.CompanyAhasreceivedadvicefromitslawyersthattheamountofthedamagescouldbeanythingbetween20000and7million.
Thisisapresentobligationandtheobligatingeventhasoccurred,thereforeitisaliability;howevertheamountcannotbereliablymeasuredastheestimatedrangeistoogreat.Thereforethisshouldbedisclosedasacontingentliability,beingaliabilitythatfailstherecognitioncriterionofreliablemeasurement.
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 527oktober2010
2. Acompanyhasequipmentforwhichtheenginerequirestobereplacedeveryfiveyears.
Determinewhetheraprovisionshouldberecognized.
Priortothecompanyincurringtheexpenditure,noprovisioncanbemadeforreplacementoftheengine,becausethecompanyhasnopresentobligationasitdoesnothavetoreplacetheengine.Forexample,itcouldavoidtheobligationbyshuttingdowntheequipment.Thisconclusionisconfirmedbyusingthesimpleyearendtest:ifthecompanydidnotcontinuetotradebeyondtheendof(say)yearthree,therewouldbenoneedtoincurthefutureexpenditureontheengine.Butalthoughnoprovisioncanbebuiltupoverthefiveyearsbeforetheexpenditureisduetobeincurred,theengineshouldbeseparatelyidentifiedanddepreciatedoverthatperiod.Whentheexpenditureisincurredtoreplacetheenginethiswillbecapitalizedaspartofthecostoftheequipmentanddepreciatedovertheperioduntilitisnextreplaced,thusavoidinganydoublecountingintheincomestatement.Thecostanddepreciationattributedtotheequipmentoriginallyshouldberemovedfromthestatementoffinancialpositiononcethecostofthenewenginehasbeencapitalizedtoavoiddoublecountinginthestatementoffinancialposition.
3. Acompanyleasesashipunderafinanceleasefor25years.Inordertobeseaworthyithastoobtainacertificateofseaworthiness,whichentailstheentitycarryingoutsignificantmaintenanceandoverhaulworkinadrydockeveryfiveyears.Withoutsuchacertificatetheshipcannotoperate.Thismatterisreferredtointhefinanceleaseagreement,whichrequirestheshiptobemaintainedinaseaworthycondition.
Determinewhetheraprovisionshouldberecognized.
Althoughtheshipcannotcontinuetooperatewithoutacertificateofseaworthiness,thisinitselfdoesnotobligatethecompanytocarryouttherequiredmaintenancework.Itcouldinsteaddecidetolayuptheshipandnotcontinueitsoperation.Thetermsoftheleasewouldhavetobecarefullyscrutinizedtoensuretherewerenoclausesthatcouldchangethisconclusion,forexampleterminationclausesmightcreateanobligation.Wherenoobligationiscreatedbythelease,noprovisioncanbemadeforthesecosts.However,iftheelementoftheassetthatwearsoutcanbeidentifiedattheoutset,thiscostshouldbeamortizedoverthefiveyearterminthesamewayasiftheassetwereanownedasset.Whenthemaintenanceworkiscarriedout,thismaybecapitalizedifitrestorestheshipseconomicbenefits.
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 627oktober2010
4. Acompanyiscurrentlyatenantofapropertyandisduetovacateitinfiveyearstime.Thereisaclauseinthetenancyrelatingtodilapidationworkwhichmustbeundertakenbeforethepropertyisvacated.Inaddition,thereisalsoaclausewhichenablesthelandlordtorechargethetenantforcostsrelatedtorepairingthefabricofthebuilding.Inthisregard,thelandlordisintendingtoreplacethecladdingonthebuildingandisobtainingquotesforthiswork.
Determinewhetheraprovisionshouldberecognized.
Provisionshouldbemadefortheestimatedcostsofthedilapidationrepairsspreadovertheperiodofthetenancyforthefollowingreasons:
Thetenanthasapresentlegalobligation,arisingfromtheleaseagreement Theobligatingeventisthewearandteartotheproperty,whicharisesovertheperiodofthetenancy
anditsrepaircanbelegallyenforced Becausetheobligationarisesfromthewearandteartotheproperty,itisnotrelatedtofuture
operatingcosts Itisalmostcertainthattheobligationwillresultinanoutflowofeconomicbenefits Itispossibletomakeareliableestimateoftheyearlyobligationarisingfromtheextentofthewear
andteartakingplaceeachyear.Thiswillnotnecessarilyequatetoonefifthoftheestimatedtotal.
Withregardtorepairingthefabricofthebuilding,itshouldbeclearfromtheleasewhetherornotanobligationarises.Ifdamagehasalreadybeendonetothepropertythenaprovisionshouldbemadeforthewholeoftherectificationworkwhenthedamageisidentified.
5. Anenterpriseintheoilindustrycausescontaminationbutcleansuponlywhenrequiredtodosounderthelawsoftheparticularcountryinwhichitoperates.Onecountryinwhichitoperateshashadnolegislationrequiringcleaningup,andtheenterprisehasbeencontaminatinglandinthatcountryforseveralyears.At31December2000itisvirtuallycertainthatadraftlawrequiringaleanupoflandalreadycontaminatedwillbeenactedshortlyaftertheyearend.
Determinewhetheraprovisionshouldberecognized.
Theobligatingeventisthecontaminationofthelandbecauseofthevirtualcertaintyoflegislationrequiringcleaningup.Anoutflowofresourcesembodyingeconomicbenefitsinsettlementisprobable.Therefore,aprovisionisrecognizedforthebestestimateofthecostsofthecleanup(seeIAS37.14and.22).
6. Anenterpriseintheoilindustrycausescontaminationandoperatesinacountrywherethereisnoenvironmentallegislation.However,theenterprisehasawidelypublishedenvironmentalpolicyinwhichitundertakestocleanupallcontaminationthatitcauses.Theenterprisehasarecordofhonoringthispublishedpolicy.
Determinewhetheraprovisionshouldberecognized.
Theobligatingeventisthecontaminationoftheland,whichgivesrisetoaconstructiveobligationbecausetheconductoftheenterprisehascreatedavalidexpectationonthepartofthoseaffectedbyitthattheenterprisewillcleanupcontamination.Anoutflowofresourcesembodyingeconomicbenefitsinsettlementisprobableandaprovisionisrecognizedforthebestestimateofthecostsofcleanup(seeIAS37.10(thedefinitionofaconstructiveobligation),.14and.17).
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 727oktober2010
7. Aretailstorehasapolicyofrefundingpurchasesbydissatisfiedcustomers,eventhoughitisundernolegalobligationtodoso.Itspolicyofmakingrefundsisgenerallyknown.
Determinewhetheraprovisionshouldberecognized.
Theobligatingeventisthesaleoftheproduct,whichgivesrisetoaconstructiveobligationbecausetheconductofthestorehascreatedavalidexpectationonthepartofitscustomersthatthestorewillrefundpurchases.Anoutflowofresourcesembodyingeconomicbenefitsinsettlementisprobable,sinceaproportionofgoodsarereturnedforrefund(seeparagraph24).Therefore,aprovisionisrecognizedforthebestestimateofthecostsofrefunds(seeparagraphs10(thedefinitionofaconstructiveobligation),14,17and24).
8. Undernewlegislation,anenterpriseisrequiredtofitsmokefilterstoitsfactoriesby30June20X0.Theenterprisehasnotfittedthesmokefilters.
Determinewhetheraprovisionshouldberecognized.
a. Atthebalancesheetdateof31December20X1
Thereisnoobligationbecausethereisnoobligatingeventeitherforthecostsoffittingsmokefiltersorforfinesunderthelegislation.Noprovisionisrecognizedforthecostoffittingthesmokefilters(seeIAS37.14andIAS37.17to.19).
b. Atthebalancesheetdateof31December20X0
Thereisstillnoobligationforthecostsoffittingsmokefiltersbecausenoobligatingeventhasoccurred(thefittingofthefilters).However,anobligationmightarisetopayfinesorpenaltiesunderthelegislationbecausetheobligatingeventhasoccurred(thenoncompliantoperationofthefactory).Assessmentofprobabilityofincurringfinesandpenaltiesbynoncompliantoperationdependsonthedetailsofthelegislationandthestringencyoftheenforcementregime.Noprovisionisrecognizedforthecostsoffittingsmokefilters.However,aprovisionisrecognizedforthebestestimateofanyfinesandpenaltiesthataremorelikelythannottobeimposed(seeIAS37.14andIAS37.17to.19).
9. Healthandsafetylegislationhasbeenintroducedthatrequiresasbestostoberemovedfromallbuildings.Asbestosremovalisrequiredwhetherornotthepropertyisinuse.Thelegislationiseffectivefrom31December20X2.EntityAownsa20yearoldfactorythatincludesasbestos.TheestimatedcostofremovingtheasbestosisCU70000,plusafurtherCU30000inlostprofitsbecausethefactorywillnotbeabletooperateatfullcapacitywhiletheasbestosisbeingremoved.At31December20X2,theworkhasnotcommencedinrespectoftheasbestosremoval;however,contractshavebeensignedwithcontractorsfortheworktobeperformedinthefirstfewmonthsof20X3.
Determinewhetheraprovisionshouldberecognized.
TheHealthandSafetylegislationhasbeenenactedandthereis,therefore,arequirementfortheasbestostoberemoved.Theobligating(past)eventisthecontaminationcausedbythepresenceoftheasbestosandtheexistenceofalegalrequirementtoremoveitcreatesanobligationthatshouldbeprovidedfor.Therefore,entityAshouldrecognizeaprovisionforCU70000,beingthecostofremovingtheasbestos.Noprovisionshouldbemadefortheoperatinglossesthatwillbeincurredduringtheperiodofasbestosremoval,becausethereisnoobligationtoincurtheselosses.Managementcouldattempttorescheduleorrelocateoperationstoavoidorminimizethelosses.Theoperatinglossesareanindirectresultoftherequirementtoremovetheasbestos.Theexistenceofsignedcontractsdoesnotaffecttheconclusionofwhethertoprovideforthecosts.Thecontractsareexecutorcontracts,sonoliabilitytothecontractorarisesuntilthecontractorperformsworkunderthecontract.
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 827oktober2010
Theintroductionofthenewlawdoesnotcreatetheobligatingeventonitsown.Itisthecombinationofthepastcontaminationandthenewlawthatcreatestheobligationtoremovetheasbestos.Thiscanbecontrastedwiththesmokefiltersinthepreviousexamplewherethereisnopastcontaminationandsotheobligationcreatedwhenthelegislationcomesintoforceisonlyforpenaltiesandfines.10. Thegovernmentintroducesanumberofchangestotheincometaxsystem.Asaresultofthesechanges,anenterpriseinthefinancialservicessectorwillneedtoretrainalargeproportionofitsadministrativeandsalesworkforceinordertoensurecontinuedcompliancewithfinancialservicesregulation.Atthebalancesheetdate,noretrainingofstaffhastakenplace.
Determinewhetheraprovisionshouldberecognized.
Thereisnoobligationbecausenoobligatingevent(retraining)hastakenplace.Noprovisionisrecognized(seeIAS37.14andIAS37.17to.19).
11. Acompanysellsgardeningmerchandise.Onsomeofitsproductsitwarrantsatthetimethesaleismadethatitwillmakegoodbyrepairorreplacementmanufacturingdefectsthatbecomeapparentwithinoneyearfromthedateofsale.Itspastexperienceshowsthatitdoesreceivewarrantyclaimsontheseproducts.
Determinewhetheraprovisionshouldberecognized.
Aprovisionshouldbemadeforthebestestimateoftheobligationforthefollowingreasons: Alegalobligationexistswhichismorelikelythannottoarise Theobligatingeventisthesaleoftheproductandthenormaloneyearwarrantycanbelegally
enforced Therelatedcostsofrepairdonotrelatetothecompanysfutureoperations Frompastexperience,itismorelikelythannotthattheobligationwillresultinanoutflowofeconomic
benefits Areliableestimateoftheobligationcanbemadefromthecompanyspreviousclaimsexperience.
Usingthesimpleyearendtest,ifthecompanystoppedtradingatitsyearend,itwouldstillbeliablefortheobligationsarisingfromwarrantiesithasalreadygiven.Hence,provisionisrequired.
Wouldyouranswerchangeifthecompanymakesapaymenttoathirdpartyinsurer,whichunderwritestherisk.Intheeventofaclaimbyacustomer,thecompanywouldclaimacorrespondingamountfromtheinsurer.
Provisionwouldbemadeforthewarrantyforthereasonsgivenabove.Themereexistenceoftheunderwritingagreementdoesnotmeanthatthecompanycanignorethewarrantyobligation.Thecustomerhasrecoursedirectlytothecompanyforthewarranty.Thecompanyinturnhasaclaimontheinsurancecompany,butthisdoesnotoffsetthecompanysobligationtoitscustomer.Hencethecompanywillhavetoprovideforitsbestestimateofitswarrantyobligation.Itwillhavetoconsiderwhetherornotitcanrecognizeitscounterclaimonitsinsurer.Itcannotrecognizeaseparatedebtorforsuchclaims,unlessitisvirtuallycertainthatitwillrecoverthefundsfromtheinsurer.Ifitcannotbethiscertain,thenitshoulddisclosetheexistenceofthecontingentassetinthenotestoitsfinancialstatements.
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IAS37Provisions,contingentliabilitiesandcontingentassetsDefinitions
InstituutvandeBedrijfsrevisoren 927oktober2010
12. Acompanysellsanadditiveforleadedpetrolengines,whichallowsthemtocomplywithnewemissionrequirements.Thecompanyhasheardfromtherepresentativesoftencustomerswhoclaimthatthecanistershaveburstopenonuseandtheadditivehasburnttheirhands.Theycontendthatthecanisterswerefaulty.Thecompanyisinsuredforsuchliabilitiesanddoesnotexpecttoloseanymoneyiftheclaimssucceed.
Determinewhetheraprovisionshouldberecognized.
Thefirststageinestablishingwhetheraprovisionshouldbemadeistodeterminewhetherthereisapresentobligation.Thepasteventarisesfromthesaletothecustomerofthepotentiallyfaultygoods.Apresentobligationwillarisefromeitherthecompanybeingfoundresponsibleforthecanistersburstingorfromthecostsassociatedwithdefendingtheclaim,evenwherethecompanyisnotliable.Theprosecutionwillhavetoprovethatapresentobligationhasarisenfromthecanistersburstingandthatsomecompensationisthenpayable.Whereitisunclearwhetherthecompanyisliable,itwillbenecessaryforthecompanydefindingtheactiontodeterminewhetherthereisapresentobligationarisingfromthepasteventandthismightentailitsseekingexpertadvice.Intheexample;thecompanymightcontendthatthereisnothingwrongwiththecanistersandthecustomersdidnotfollowthecompanysinstructionleaflet,whichclearlyshowshowtoavoidthereportedproblem.Ifitismorelikelythannot(thatis,greaterthana50%chance)thatthecompanyisliableforthecanistersbursting,thereisapresentobligationforwhichprovisionshouldbemadeifitisprobablethatanoutflowofeconomicbenefitswillbenecessary.Whereacompanydoesnotbelievethereisacasetoanswer,provisionforsomecostsmightstillbejustifiedatthebalancesheetdate.Inthiscase,thepresentobligationarisesfromthedecisiontodefendtheactionandthebestestimateofthecoststhatwillbeincurredindoingthatshouldbeprovided.
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IAS37Provisions,contingentliabilitiesandcontingentassetsMeasurement
InstituutvandeBedrijfsrevisoren 1027oktober2010
MEASUREMENT
BEST ESTIMATE
Determinetheamountoftheprovisiontoberecognized
1. Anentityfacesasinglelegalclaim,witha40%likelihoodofsuccesswithnocost,anda60%likelihoodoffailurewithacostof1m.
Wheretheprovisionrelatestoasingleevent,orasmallnumberofevents,expectedvalueisnotavalidtechniquesincetheoutcomewillneverbeacostof600,000(60%x1m).Itwilleitherbenilor1m.IAS37.40statesthattheprovisionshouldrepresentwhicheveristhemostlikelyofthesetwooutcomes.Itthisexample,itismorelikelythatacostof1mwillresult,andthereforefullprovisionwouldbemade.Asageneralruleofthumb,wherethemostlikelyoutcomeisclosetoexpectedvalue,itwillbeappropriatetoprovidethemostlikelyoutcomesinceexpectedvalueprovidesevidenceoftheprobableoutflowofbenefits.
2. Anentityfaces100legalclaims,eachwitha40%likelihoodofsuccesswithnocost,anda60%likelihoodoffailurewithacostofeachclaimof1m.
Usingexpectedvalue,thestatisticallikelihoodisthat60%ofclaimswillresultinacostof1m,thustheprovisionshouldbe60%*100*1m=60m.
3. Anentityisrequiredtoreplaceamajorcomponentinanassetunderawarranty.Eachreplacementcosts1m.Fromexperience,thereisa30%chanceofasinglefailure,50%chanceoftwofailures,anda20%chanceofthreefailures.
Themostlikelyoutcomeistwofailures,costing2m.Theexpectedvalueis1.9m(30%*1m+50%*2m+20%*3m).Theexpectedvaluesupportstheprovisionforthemostlikelyoutcomeof2m.Asecondruleofthumb,impliedbyIAS37.40,isthatwheremostlikelyoutcomeandexpectedvaluearenotclosetogether,itwilloftenbeappropriatetoprovideforwhicheverpossibleoutcomeisnearesttotheexpectedvalue.
4. Anentityisrequiredtoreplaceamajorcomponentinanassetunderawarranty.Eachreplacementcosts1m.Fromexperience,thereisa40%chanceofasinglefailure,30%chanceoftwofailures,anda30%chanceofthreefailures.
Themostlikelyoutcomeisasinglefailure,costing1m.Theexpectedvalueis1.9m(40%x1m+30%*2m+30%*3m).Inthiscase,themostlikelyoutcomeof1mhasonlya40%probability.Thereisa60%probabilitythatthecostwillbehigher.Theoutcomeclosesttoexpectedvalueis2m,thatistwofailures.
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IAS37Provisions,contingentliabilitiesandcontingentassetsMeasurement
InstituutvandeBedrijfsrevisoren 1127oktober2010
DISCOUNT RATE
1. AcompanyhasestimatedthatitneedstopayCU1000(incurrentprices)attheendofeachofthenextthreeyearstosettleanobligation.Thecompanyhasestablishedthatthenominaldiscountrateis5.5,whichincludesanestimatedinflationof2.5%peryear.Calculatethepretaxcashflows,theposttaxcashflows,therealdiscountrateandtheamountoftheprovision.
Netpresentvalue CFYear1 CFYear2 CFYear3
CFincludinginflationof2.5%perannum
2887(PVatnominaldiscountrateof4.5%
1025 1051 1077
CFexcludinginflation2877(PVatrealdiscountrateof1.95%)
1000 1000 1000
IRR(2887;1000;1000;1000)=1.95%or((1+4.5%)/(1+2.5%))1=1.95%2. On1January20X0,theBelgiangovernmentissuesabondforconsiderationof90,transactioncostsare5.Nominalvalueofthebondis110,nominalinterestrateis3.63%.Theinterestof4p.a.isreceivableoverthenext5years(31December20X0to31December20X4).Thebondhasamandatoryredemptionof110on31December20X4.
Calculatetheyieldinterestrateforthisbondandgivetheappropriateaccountingentriesforacompanythatacquiredthisbond.
IRR(95,4,4,4,4,114)=6,96%
CA(1/1) interest cashflow CA(31/12)20X0 95.00 6.61 4.00 97.6120X1 97.61 6.79 4.00 100.4020X2 100.40 6.99 4.00 103.3920X3 103.39 7.19 4.00 106.5820X4 106.58 7.42 114.00 0.00
1/1/20X0
Dr FinancialassetBond 95Cr Cash 95
31/12/20X0
Dr Cash 4Dr FinancialassetBond 2.61Cr Interestrevenue 6.61
31/12/20X1
Dr Cash 4Dr FinancialassetBond 2.79Cr Interestrevenue 6.79
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IAS37Provisions,contingentliabilitiesandcontingentassetsMeasurement
InstituutvandeBedrijfsrevisoren 1227oktober2010
31/12/20X4
Dr Cash 4Dr FinancialassetBond 3.42Cr Interestrevenue 7.42Dr Cash 110Cr FinancialassetBond 110
EFFECT OF REIMBURSEMENTS
1. Acompanysellsvacuumcleanersonwhichitgivesthestandardwarrantyofoneyearforpartsandlabor.Inadditionaspartofashorttermmarketingcampaignitgivesafurtherfouryearwarranty.Theextendedriskisthenunderwrittenbyaninsurancecompany.Thecompanyspastexperienceshowsthatinthelastyear70%ofthevacuumcleanerssoldwillnotbesubjecttowarrantyclaimsinthefirstyear.25%willhaveminordefectsand5%willrequirereplacementormajorwork.Inthesecondtofifthyears.experiencetodateshowsthat25%ofthosetakingouttheextendedwarrantywillrequireminorworkand10%willrequiremajorwork.100000unitsweresoldintheyearand10000customersweregivenextendedwarranty.MajorrepairorreplacingtheunitcostsapproximatelyCH25.MinorrepairscostCU5each(PWC.pg21032).
Theexpectedvalueofthestandardoneyearwarrantyis:70%*nil+25%*500000+5%*2500000=CU250000.Theexpectedvalueoftheextendedwarrantyclaimsis:65%*nil+25%*50000+10%*250000=CU37500.Clearly,itwouldbeappropriateforthecompanytomakeaprovisionforthefirstyearwarrantyattheexpectedvalueofCU250000whichrepresentsthebestestimateoftheobligation.Butalso,becauseIAS37requiresprovisioningtoeffectivelybemadegrossitmaybenecessaryforthecompanytoprovidefortheextendedwarrantyobligationofCU37500.Whetherornotthisamountistobeprovidedwilldependonthearrangementwiththeinsurancecompanyunderwritingthetransaction.Ifthecustomersrecourseistotheinsurancecompanyandthereisnofurthercomebackonthecompanyexcept;forexample,thattheinsurancecompanypaysthecompanytoundertaketherepairsthenthecompanywillnotberequiredtosetupaprovisionfortheextendedwarranty.Butwherethecustomerhasredresstothecompanyandinturnthecompanymakesacounterclaimagainsttheinsurancecompanyanobligationarisesonthecompanyforwhichprovisionmustbemade.Whetherornotthecompanycanthenrecognizetherecoveryfromtheinsurancecompanywilldependonthelikelysuccessofitsclaim.Iftherecoveryisvirtuallycertainthenanassetcanberecognized.Whererecoveryisnotvirtuallycertainthanallthecompanycandoisnotacontingentassetinitsfinancialstatements.
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IAS37Provisions,contingentliabilitiesandcontingentassetsMeasurement
InstituutvandeBedrijfsrevisoren 1327oktober2010
GENERAL CASES
1. Acompanyhasenteredintoanoperatingleaseforawarehouse.Thecompanywishestousethewarehouseforofficeaccommodation.IthasplanningpermissiontospendCU1.5monbuildingamezzaninefloorandbuildingpartitioningforoffices.Theoperatingleaseisforaperiodof15yearsandthepropertymustbereturnedtothelessorinitsoriginalconditionasthisisclearlyspecifiedinthecontract.ThecompanyestimatesthatitwillcostCU500000intodayscurrencytoremovetheimprovements.
Howshouldthecompanyaccountfortheseimprovements?
ThecompanyshouldcapitalizeleaseholdimprovementsofCU1.5mandamortizethoseoverthetermoftheleaseinaccordancewithIAS16.Thecompanyhasanobligationundertheleasetoremovetheimprovementsattheendoftheleaseterm.Theobligationarisesasthecompanycompletestheimprovementsandthisrepresentsapastevent.Therefore,iftheimprovementshavebeenmadebythecompanysyearendaprovisionofthepresentvalueofCU500000in15yearstimeshouldbemadefortheireventualremoval.Inaddition,anassetofthesameamountshouldberecognizedforwhatis,ineffect,decommissioning,whichwillberecoveredfromthebenefitsgeneratedbythebusinessoverthetermofthelease.Theassetshouldthenbeamortizedovertheremainingleaseterm.
2. Anentitythatoperatesachainofretailoutletsdecidesnottoinsureitselffortheriskofminoraccidentstocustomers.Insteaditoptstoselfinsure.ItspastexperiencesuggestsitwillpayCU200000inrespectofsuchaccidents.
Howshouldthecompanyaccountforthisrisk?
Anobligationtoanotherpartydoesnotariseuntilsuchtimeasanaccidentoccurs.ThismeansthatunderIAS37rulesaprovisionofalargeramountthanthecostoftheactualaccidentsisnotpermitted.Therefore,ifnoaccidentshaveoccurredasattheyearend,thereisnopresentobligationtoanotherpartyandhencenoprovisionshouldbemade.Clearly,whereanaccidenthashappenedtheretailermightnotknowofitsoccurrencebutthisinitselfdoesnotprecludeitfrommakingaprovision.Aslongastheentityhasatrackrecordofclaimsexperiencefromwhichitcanestimatethelevelofaccidentsthathaveoccurredbutwhichhavenotyetbeenreporteditmaymakeaprovisionforitsestimateoftheobligation.
3. AcompanyexpectstobefinedCU250000forthetimetakeninsettlingitspensionmisspellingobligation.Atitsyearend,thecompanyhasnotpaidthefine,butitknowstheamountitwillhavetopayfrompublishedrates.ItanticipatesthatithasapensionmisspellingobligationofCU5m,butitstillneedstocalculatehowmuchtorepayitscustomersandwhothosecustomersare.Itisgoingtohavetoemployanumberofadditionalstafftodothisworkasitsexistingemployeesarefullyutilizedinrunningthebusiness.ThecostoftheseadditionalstaffisestimatedtobeCU300000.Inaddition,theregulatorhasrequestedthatitmakecertainsystemchangestothewayitsellspensionsandthisisexpectedtocostthecompanyafurtherCU500000,CU100000ofwhichrelatestotrainingcosts.
Howshouldthecompanyaccountforthesecosts?
Thepensionmisspellingobligationsclearlyarisefromapastevent,whichwastheoriginalsaleofpersonalpensionstocustomers.Ifthesimpleyearendtestisappliedasifthecompanydiscontinuedtradeatitsyearend,thecompanywouldberesponsibleforpayingthefineofCU250000.Inaddition,itwouldhaveanobligationofCU5mtocompensateitscustomersformisspellingthempersonalpensions.Also,itwouldhavetoincurcostsofCU300000incalculatingtheamountstobesettledandinascertainingtowhompaymentsshouldbemade.Wherethecompanyemploysadditionalstafftocarryoutthiswork,itisclearthattheseincrementalcostsshouldbeprovidedfor.Butitwouldnotbeappropriateforthecompanytoprovidea
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IAS37Provisions,contingentliabilitiesandcontingentassetsMeasurement
InstituutvandeBedrijfsrevisoren 1427oktober2010
proportionofitsoverheadcostssuchasadministrativeexpenses.ClearlythecostsofCU400000torectifythecompanyssystemsandtheCU100000trainingcostsrelatetothecompanysfutureoperationsandarenoteligibleforprovision.
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IAS37Provisions,contingentliabilitiesandcontingentassetsOnerouscontracts
InstituutvandeBedrijfsrevisoren 1527oktober2010
ONEROUS CONTRACTS
1. Anenterpriseoperatesprofitablyfromafactorythatithasleasedunderanoperatinglease.DuringDecemberX0theenterpriserelocatesitsoperationstoanewfactory.Theleaseontheoldfactorycontinuesforthenextfouryears,itcannotbecancelledandthefactorycannotberelettoanotheruser.
Determinewhetheraprovisionshouldberecognized(IAS37AppendixC).
Theobligatingeventisthesigningoftheleasecontract,whichgivesrisetoalegalobligation.Whentheleasebecomesonerous,anoutflowofresourcesembodyingeconomicbenefitsisprobable.(Untiltheleasebecomesonerous,theenterpriseaccountsfortheleaseunderIAS17,Leases).Aprovisionisrecognizedforthebestestimateoftheunavoidableleasepayments(seeIAS37.5(c),.14and.66).
2. Acompanyhasacontracttopurchaseonemillionunitsofgasat0.23perunitgivingacontractpriceofCU230000andthecurrentmarketpriceforasimilarcontractis0.16perunitgivingapriceofCU160000.
Givetheappropriateaccountingtreatmentinthefollowingsituations(PWC,pg21063)
a. Thegaswillbeusedingeneratingelectricityandtheelectricitywillbesoldataprofit.
Theeconomicbenefitsfromthecontractincludethebenefitstotheentityofusingthegasinitsbusinessandbecausetheelectricitythatisproducedcanbesoldataprofit,thecontractisnotonerous.
b. Whenthegasisusedtogenerateelectricity,thehighcostsofthegasmeansthattheelectricityissoldatalossandtheentitymakesanoveralloperatingloss.Assumethatallthegasusedbytheentitytogenerateelectricityispurchasedunderthecontract.Astheentityismakinglosses,itwillbenecessarytocarryoutanimpairmenttestontheCGUthatgeneratestheelectricityandwritedownanyassetsthatareimpaired.Totheextentthatthereisstillalossaftertheassetshavebeenfullywrittendown,thebalanceshouldbeprovidedforasaprovisionforanonerouscontract.Theimpairmenttestshouldbecarriedoutbyreferencetothenormaltimespanforimpairmenttestingandnotbyreferencetothecontractsduration.c. Thereisasalescontracttosellthegasontoathirdpartyasitisinexcessoftheentitysrequirements.Thesalescontractispricedat0.18perunit.TheentitywouldhavetopayCU55000toexitthepurchasecontract.
OnlyeconomicbenefitstobederivedfromthepurchasecontractcostingCU230000aretheproceedsfromthesalescontract,whichareCU180000.ThereforeaprovisionshouldbemadefortheonerouselementofCU50000,beingthelowerofthecostoffulfillingthecontractandthepenaltycostofcancellation(CU55000).
3. Acompanyhasa10yearleaseonapropertyatarentalofCU50000perannum.ThemarketrentisCU30000perannum.
Howshouldthecompanyaccountforthisleaseinthefollowingsituations?
a. Thepropertyisusedinthebusinessandthebusinessislossmaking.ThereisanindicationofimpairmentintheCGUandtheCGUsassetsshouldbereviewedforimpairmentandwrittendown.Iftheimpairmentlossexceedstheassetscarryingvalue,thebalanceshouldbeprovidedasaprovisionfortheonerouslease.
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IAS37Provisions,contingentliabilitiesandcontingentassetsOnerouscontracts
InstituutvandeBedrijfsrevisoren 1627oktober2010
b. Theentitynolongeroccupiesthepropertyanditisnotusedinthebusiness.AsubleaseonthepropertyhasbeenarrangedatarentofCU30000ayearfor10years.Thecompanyhasestablishedthatthenetcostofcontinuingwiththeleaseislessthanthepenaltyforexitingthelease.
ThemaximumbenefitstobederivedfromthecontractareCU30000for10years.ThecashinflowofCU30000shouldbedeductedfromthecashoutflowsofCU50000andthebalanceofCU20000shouldbediscountedusingariskfreeratetogivetheamountthatshouldbeprovidedontheonerouselementofthelease.
c. Thepropertyisemptyandisnotsublet.However,thecompanyisabank(oraretailer)andalsohaslotsofotherpropertieswheretheleasesareabovemarketrates.Thecompanydoesnotconsideritisfairtoprovideforthislease,inisolation.Itmayormaynotreopenthepropertyanduseitagaininitsbusiness.
Ifitisonlyapossibilitythatthepropertywillbeusedagaininthebusiness,theprudentapproachwouldbetoprovide.However,wheretheentityplanstousethepropertyagaininitsbusiness,itisnecessarytolookattheCGUofwhichthepropertyformspart.ThisCGUwillnotnecessarilyincludeallofthecompanysproperties,butonlythosethatformpartoftheCGU.TheCGUisthenassessedforimpairmenttakingaccountofthenetcashoutflowsfromtheemptyproperty.IftheCGUhassufferedanimpairmentthentheassetsshouldbewrittendown,iftheamountoftheimpairmentismaterial.
d. Thepropertyisemptyandisnotsublet.However,thecompanyisabank(oraretailer)andalsohaslotsofotherpropertieswheretheleasesareabovemarketrates.Thecompanyintendseithernevertousethepropertyagainand/ortodisposeofthelease
ThepropertyleasecannotbeviewedinconjunctionwiththeCGUofwhichitformspart,becausewhereanassetisheldforsaleitdoesnotbelongtoanyotherCGU,butisconsideredtobeaCGUofitsown.Provisionshould,thereforebemadefortheonerouscontract.
4. Acompanyhasanoperatingleaseonaretailstore.Theairconditioningsystemisunreliableandthecompanyproposestoreplaceit.Thestorewillbeclosedwhiletheworksarecarriedout.
Canthecompanyprovideinadvancefortherentthatispayableduringthecloseperiod?
IAS37doesnotpermitprovisionstobemadeforfutureoperatinglosses.Theeconomicbenefitsofthestoreslease,theeconomicbenefitsfromitincludethefuturecashflowsthatareexpectedtobeearnedfromoperatingthestore.Theleasewouldbeonerousonlyiftherentalsforitsfulltermcouldnotberecovered(inpresentvalueterms)fromthefuturecashflows.5. Acompanyhasa10yearleaseonapropertyatarentalofCU50000perannumandthemarketrentisCU30000perannum.However,thecompanynolongerusesthepropertyandneverwilldosoagain.Itis,therefore,goingtomakeaprovisionforanonerouscontract.Ithasnotyetfoundasublessee,butexpectstodososoon.
Isitacceptableforthecompanytoanticipatethefuturesubleaseindeterminingtheprovisiontobemade?
Theexpectedbenefitstobereceivedshouldbetakenintoaccount.Consequently,itisreasonabletotakeaccountoftheexpectedrenttobereceivedunderasubleaseindeterminingtheprovision,providedthatthecompanyisactivelyseekingtosublettheproperty,thereisevidence(fromestateagentsorsimilar)thatthepropertycanbelet,andthereisreasonableevidenceastotherentthatmaybeobtainedinanopenmarketrental.
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IAS37Provisions,contingentliabilitiesandcontingentassetsOnerouscontracts
InstituutvandeBedrijfsrevisoren 1727oktober2010
6. AidaNVsignsathreeyearcontractwithRamadesSA.Managementcanestimatetheoutcomeofthecontractreliablyattheendofyear1.AtthatmomentestimatedtotalcontractrevenueisCU2400andtotalcostswillbeCU2000.CU800wereincurredduringyear1(Cethys,2008).a. Calculatethepercentageofcompletionofthecontractattheendofyear1,andtheamountsof
revenueandcoststhatwillbeincludedintheprofitandlossstatement.
Totalrevenue 2400Estimatedcoststocomplete (2000)Estimatedtotalgrossprofit 400
Costsincurredtodate 800Totalestimatedcosts 2000Percentageofcompletionatendofyear1 40%Recognizedcosts 800Recognizedrevenue 960Profit 160
b. Inyear2,costsofCU900areincurred.ManagementestimatesthatthecoststocompletethecontractareCU1000.Calculatetheamountofrevenueandcosttoincludeintheprofitandlossstatement.
Costsincurredtodate 1700Estimatedcoststocomplete 1000Totalestimatedcosts 2700Estimatedrevenue 2400Estimatedloss (300)
ThelossofCU300isrecognizedimmediatelyasanexpenseinyear2.Inaddition,theprofitofCU160recognizedinyear1isreversed,whichleadstoatotallossrecognizedinyear2ofCU450.
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IAS37Provisions,contingentliabilitiesandcontingentassetsRestructurings
InstituutvandeBedrijfsrevisoren 1827oktober2010
RESTRUCTURINGS
RECOGNITION OF A RESTRUCTURING PROVISION
Determinewhetherarestructuringprovisionshouldberecognizedinthefollowingsituations:
1. On12DecemberX0theboardofanenterprisedecidedtoclosedownadivision.a. Beforethebalancesheetdate(31December20X0)thedecisionwasnotcommunicatedtoanyofthoseaffectedandnootherstepsweretakentoimplementthedecision.
Therehasbeennoobligatingeventandsothereisnoobligation.Noprovisionisrecognized.
b. On20December20X0adetailedplanforclosingdownthedivisionwasagreedbytheboard;lettersweresenttocustomerswarningthemtoseekanalternativesourceofsupplyandredundancynoticesweresenttothestaffofthedivision.
Theobligatingeventisthecommunicationofthedecisiontothecustomersandemployees,whichgivesrisetoaconstructiveobligationfromthatdate,becauseitcreatesavalidexpectationthatthedivisionwillbeclosed.Anoutflowofresourcesembodyingeconomicbenefitsinsettlementisprobable.Aprovisionisrecognizedat31DecemberX0forthebestestimateofthecostsofclosingthedivision(seeIAS37.14and.72).
2. Acompanyhasannouncedatitsyearendthatithasputasubsidiaryupforsaleandifitcannotfindabuyeritwillclosedowntheentity.
Itishardtosaythatthecompanyiscommittedtoacourseofactionifitstillhasoptionsopentoit.Therefore,companycannotmakeprovisionforthereorganisationalthoughitmayhavetodoanimpairmentreview.
3. CompanyAacquirescompanyB,effective1March20X5.Atthedateofacquisition,companyAintendstocloseadivisionofcompanyB.Asatthedateofacquisition,managementhasdevelopedandtheboardhasapprovedthemainfeaturesoftherestructuringplanand,basedonavailableinformation,bestestimatesofthecostshavebeenmade.Asatthedateofacquisition,apublicannouncementofcompanyAsintentionshasbeenmadeandrelevantpartieshavebeeninformedoftheplannedclosure.Withininaweekoftheacquisitionbeingeffected,managementcommencestheprocessofinformingunions,lessors,institutionalinvestorsandotherkeyshareholdersofthebroadcharacteristicsofitsrestructuringprogram.Adetailedplanfortherestructuringisdevelopedwithinthreemonthsandimplementedsoonthereafter.
ShouldcompanyAcreateaprovisionforrestructuringaspartofitsacquisitionaccountingentries?
NounderIFRS3theacquirercannotrecognizetheprovisionifitisnotalreadyrecognizedasaliabilityoftheacquiree.
HowwouldyouranswerchangeifallthecircumstancesarethesameasthoseaboveexceptthatcompanyAdecidedthat,insteadofclosingadivisionofcompanyB,itwouldclosedownoneofitsownfacilities?
Inthissituation,althoughtheclosingofthefacilityonlyarisesbecauseoftheproposedacquisition,whetherornotapresentobligationexistswouldneedtobeconsideredinaccordancewiththerequirementsforaninternalrestructuringasopposedtoarestructuringrecognizedaspartofanacquisition.Thisisbecauserequirementsrelatingtorestructuringprovisionsrecognizedaspartofanacquisitionrelateonlytoassetsandliabilitiesoftheacquiree.Sincetheintendedclosurerelatestoanoperationoftheacquirer,arestructuringprovisioncannotberaisedinthebooksoftheacquireeandcannotbeconsideredaspartofarestructuringrecognizedaspartofanacquisition
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IAS37Provisions,contingentliabilitiesandcontingentassetsRestructurings
InstituutvandeBedrijfsrevisoren 1927oktober2010
COST OF RESTRUCTURING
1. Determinewhetherthefollowingcostsshouldbeincludedorexcludedwhenmeasuringtherestructuringprovision(PWC,pg21057)
Descriptionofcosts Included/excluded ReasonforexclusionVoluntaryredundancies InCompulsoryredundancies,ifthetargetforvoluntaryredundanciesarenotmet
In
Leasecancellationfeesforafactorythatwillnolongerbeused
In
Relocationofemployeesandrelatedequipmentfromafactory(tobeclosed)toafactorythatwillcontinuetobeused
Ex Costsassociatedwithongoingactivities
Retrainingofremainingemployees Ex Costsassociatedwithongoingactivities
Recruitmentcostsforanewmanager Ex Costsassociatedwithongoingactivities
Marketingcoststodevelopnewcorporateimage
Ex Costsassociatedwithongoingactivities
Investementsinanewdistributionnetwork Ex Costsassociatedwithongoingactivities
Futureidentifiableoperatinglossesuptothedateofarestructuring
Ex Costsassociatedwithongoingactivities
Impairmentwritedownofcertainproperty,plantandequipment
Ex TheimpairmentprovisionshouldbeassessedinaccordancewithIAS36andoffsetagainsttheasset
Costsoftheremainingnoncancellabletermofanoperatingleaseafteroperationscease
In
RConsultingfeestoidentifyfuturecorporatestrategiesandorganizationalstructures
Ex Costsassociatedwithongoingactivities
Costsofrelocatinginventoryandequipmentthatwillbeusedatanotherlocation
Ex Costsassociatedwithongoingactivities
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IAS37Provisions,contingentliabilitiesandcontingentassetsRestructurings
InstituutvandeBedrijfsrevisoren 2027oktober2010
2. CompanyTsdirectorsdecidedon3May20X5torestructurethecompanysoperationsasfollows(Alfredson,pg192,Problem5.1): FactoryZwouldbecloseddownandputonthemarketforsale. 100employeesworkinginFactoryZwouldberetrenchedeffective31May20X5andwouldbepaid
theiraccumulatedentitlementsplus3monthswages. Theremaining20employeesworkinginFactoryZwouldbetransferredtoFactoryX,whichwould
continueoperating. 5headofficestaffwouldberetrenchedeffective30June20X5andwouldbepaidtheiraccumulated
entitlementsplus3monthswages.
AsatCompanyTsbalancesheetdateof30June20X5thefollowingtransactionsandeventshadoccurred:
FactoryZwasshutdownon31May20X5.Anofferof4mhadbeenreceivedforFactoryZbutthereisnobindingsalesagreement.
The100retrenchedemployeeshaveleftandtheiraccumulatedentitlementshadbeenpaid.Howeveranamountof76000,representingaportionofthe3monthswagesfortheretrenchedemployees,hadstillnotbeenpaid.
Costsof23000wereexpectedtobeincurredintransferringthe20employeestotheirnewworkinFactoryX.Thetransferwilloccuron14July20X5.
Fourofthefiveheadofficestaffhadbeenretrenched,hadleftandtheiraccumulatedentitlements,includingthe3monthswages,hadbeenpaid.Howeveroneemployee,JerryPerry,remainedontocompleteadministrativetasksrelatingtotheclosureofFactoryZandthetransferofstafftoFactoryX.Jerrywasexpectedtostayuntil31July20X5.JerryssalaryforJulywouldbe4000andhisretrenchmentpackagewouldbe13000,allofwhichwouldbepaidonthedayheleft.Heestimatedthathewouldspend60%ofhistimeadministeringtheclosureofFactoryZ,30%ofhistimeadministeringthetransferofstafftoFactoryXandtheremaining10%ongeneraladministration.
CalculatetheamountoftherestructuringprovisionrecognizedinCompanyTsfinancialstatementsasat30June20X5,inaccordancewithIAS37.
Anofferof4mhadbeenreceivedforFactoryZ;howevertherewasnobindingsalesagreement:Thisisaredherringthebindingsaleagreementtestinpara.78appliestothesaleofanoperation.Inthiscasethefactoryhasalreadybeenshutdownandthustheimplementationoftherestructuringhasvirtuallybeencompleted.Theliabilityrelatingtotheretrenchedpersonnelshouldbeincludedintheprovisionastheimplementationoftherestructuringhascommencedandtheamountrepresentsapresentobligation.Thecostotherelocationoftheremainingemployeesisnotincludedsincethecostsrelatetoongoingoperations.Theamounttobeprovidedfortheheadofficestaffis(60%*4000)+13000=15400.
Thereforetotalprovision=76000+15400=91400.
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IAS37Provisions,contingentliabilitiesandcontingentassetsChangesinexistingdecommissioning,restorationandsimilarliabilities
InstituutvandeBedrijfsrevisoren 2127oktober2010
IFRIC 1 CHANGES INEXISTING DECOMMISSIONING, RESTORATION AND SIMILAR LIABILITIES
1. TheKoebergOffshoreOilRighasrecentlybeenconstructed,andwillbecommencingproductionduringthecurrentfinancialyear.Managementestimatesthattheoilfieldhasausefullifeof10years,followingwhichtherigwillneedtobedismantledandremovedfromthesiteandthearearestoredtoitsoriginalcondition.Theestimatedcostofthisdecommissioningamountsto900000CUforthedismantlingoftherigandthecappingofthewellheadand100000CUforfinalclearingofresidualpollutiondamagewhichislikelytooccurthroughnormalproductionactivityoverthe10yearperiod.Thecostofcapitaloftheenterpriseisestimatedat5%p.a.
YoumayassumethattheKoebergOilRigwasconstructedinyear0andthatitwillcomeintoproductiononthefirstJanuaryofthecurrentfinancialyear(=year1).
Givetheaccountingentriesforyear0toyear10.
a. Year0
Assumingadiscountrateof5%p.a.,wecancalculatethepresentvalueofthedecommissioningcostsrelatedtoconstruction:PV=900000/(1+0,05)10=552522
Dr Asset 552522Cr Provisionfordecommissioning 552522
b. Theendofyear1
Clearingcostsrelatedtoproductionforyear1:PV=10000/(1+0,05)9=6446
Accrualofinterestontheprovisionsmadeinyearsbefore(underIAS37):0,05*552522=27626
Depreciationoftheasset:552522/10=55252,2
Dr Expenses 6446Cr Provisionforclearing 6446Dr Interestexpense 27626Cr Provisionfordecommissioning 27626Dr Depreciationexpense 55252,2Cr Accumulateddepreciation 55252,2
c. Theendofyear2
Clearingcostsrelatedtoproductionforyear2:PV=10000/(1+0,05)8=6768
Accrualofinterestontheprovisionsmadeinyearsbefore(underIAS37):
0,05*(552522+27626)=29007
0,05*6446=322
Depreciationoftheasset:552522/10=55252,2
Dr Expenses 6768Cr Provisionforclearing 6768Dr Interestexpense 29007Cr Provisionfordecommissioning 29007
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IAS37Provisions,contingentliabilitiesandcontingentassetsChangesinexistingdecommissioning,restorationandsimilarliabilities
InstituutvandeBedrijfsrevisoren 2227oktober2010
Dr Interestexpense 322Cr Provisionforclearing 322Dr Depreciationexpense 55252,2Cr Accumulateddepreciation 55252,2
d. Theendofyear10
Clearingcostsrelatedtoproductionforyear10:PV=10000/(1+0,05)0=10000
Accrualofinterestontheprovisionsmadeinyearsbefore(underIAS37):
0,05*(552522+27626+29007+30458+31981+33580+35259+37022+38873+40816)=42857
0,05*(6446+322+6768+677+7107+1066+7462+1492+7835+1959+8227+2468+
8638+3023+9070+3628+9524)=4286
Depreciationoftheasset:552522/10=55252,2
Dr Expenses 10000Cr Provisionforclearing 10000Dr Interestexpense 42857Cr Provisionfordecommissioning 42857Dr Interestexpense 4286Cr Provisionforclearing 4286Dr Depreciationexpense 55252,2Cr Accumulateddepreciation 55252,2e. Year11
Payingforthedismantlingoftherigandthecappingofthewellheadandforfinalclearingofresidualpollution
Dr Provisionfordecommissioning 900000Cr Cash 900000Dr Provisionfordecommissioning 100000Cr Cash 0
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IAS37Provisions,contingentliabilitiesandcontingentassetsChangesinexistingdecommissioning,restorationandsimilarliabilities
InstituutvandeBedrijfsrevisoren 2327oktober2010
2. Anentityhasanuclearpowerplantandarelateddecommissioningliability.Thenuclearpowerplantstartedoperatingon1January20X0.Theplanthasausefullifeof40years.ItsconstructioncostwasCU110000.Theentityestimatesthatthecashoutflowfordecommissioningcostin40yearswillbeCU70400.Theriskadjustedrateis5%.Theentitysfinancialyearendson31December(BasedonIEinIFRIC1).a. Accountfortheinitialcostofthepowerplantat1January20X0PVof70400,discountedat5%over40yearsis10000.
Dt Powerplant(constructioncost)(A) 110000Dt Powerplant(ARO)(A) 10000Ct Suppliers(L) 110000Ct Provisionforassetretirementobligation(L) 10000
b. Givetheaccountingentrieson31December20X0
Dt Depreciationcost(IS) 3000Ct Powerplant(constructioncost) 3000Dt Financecost 500Ct Liability 500
c. On31December20X9,thediscountratehasnotchanged.However,theentityestimatesthat,asaresultoftechnologicaladvances,theestimatedoutflowforthedecommissioninginyear40willnotbeCU70400,but35200.Accountforthischangeinestimate.
On31December20X9,theplantis10yearsold.AccumulateddepreciateddepreciationisCU30000(CU120000*10/40years)).Becauseoftheunwindingofdiscount(5%)overthe10years,thedecommissioningliabilityhasgrownfromCU10000toCU16300.ThepresentvalueofCU35200isCU8144.
Dt Liability(163008144) 8156Ct Powerplant(ARO) 8156
NotethattheseparatecomponentfortheAROisonlyCU7500atthismoment.Theaccountingvalueofthepowerplantisnow:120000300008156=81844.
d. Givetheaccountingentrieson31December20X10
Dt Depreciationcost(IS) 2728Ct Powerplant(constructioncost) 2728Dt Financecost 407Ct Liability 407
e. On31December20X11theentitystillbelievesthatitscashoutflowfordismantlingtheplantwillbeCU35200,butitrevisesitsdiscountrateto4%.Givetheappropriateaccountingentries.
Dt Depreciationcost(IS) 2728Ct Powerplant(A) 2728Dt Financecost(IS) 428Ct Liability(L) 428
Thecarryingamountoftheliabilitybeforeadjustmenttothenewdiscountrateis:CU8144+CU407+CU428=CU8979.Basedonthenewdiscountrateof4%,thepresentvalueofCU35200over29yearsis11287,thereforethefollowingaccountingentryshouldbemade:
Dt Powerplant(A) 2308Ct Provisionforassetretirementobligation(L) 2308
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IAS37Provisions,contingentliabilitiesandcontingentassetsChangesinexistingdecommissioning,restorationandsimilarliabilities
InstituutvandeBedrijfsrevisoren 2427oktober2010
f. On31December2012,nothinghaschanged.Givetheappropriateaccountingentries.
Dt Depreciationcost(IS) 2 728Ct Powerplant(A) 2728Dt Financecost(IS) 452Ct Liability(L) 452
I I
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IAS37Provisions,contingentliabilitiesandcontingentassetsFinancialguaranteecontracts
InstituutvandeBedrijfsrevisoren 2527oktober2010
FINANCIAL GUARANTEE CONTRACTS
On31December20X2,entityAgivesaguaranteeofcertainborrowingsofentityB,whosefinancialconditionatthattimeissound.ThetransactionisatfairvalueandentityAreceivesapremiumfortheguarantee,whichitwilldeferandrecognizeasincomeovertheperiodoftheunderlyingriskexposure.Undertheguaranteesterms,entityAwillmakespecidiedpaymentstoreimbursetheholderforanylossitincursifentityBfailstomakepaymentwhendue.
Givetheaccountingtreatmentat31December20X2
Theobligatingeventisthegivingoftheguarantee,whichgivesrisetoalegalobligation.At31December20X2,thefinancialpositionofentityBissound.Therefore,anoutflowofeconomicbenefitsisnotprobableat31December20X2.Theguaranteeisinitiallyrecognizedatfairvaluewhichisthevalueofthepremiumreceived.
During20X3,thefinancialconditionofentityBdeterioratesandat30June20X3entityBfilesforprotectionfromitscreditors.HowwillAtreatthis?
Theobligatingeventisthegivingoftheguarantee,whichgivesrisetoalegalobligation.At31December20X3thefinancialpositionofentityBhasdeterioratedsuchthatitisprobablethatanoutflowofeconomicbenefitswillberequiredtosettletheobligation.Theguaranteeissubsequentlymeasuredatthehigherof(a)thebestestimateoftheobligationdeterminedinaccordancewithIAS37,and(b)theamountinitiallyrecognizedlesscumulativeamortization.
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IAS37Provisions,contingentliabilitiesandcontingentassetsCustomerloyaltyprogrammes
InstituutvandeBedrijfsrevisoren 2627oktober2010
IFRIC 13 CUSTOMER LOYALTYPROGRAMMES
Howshouldtheentityaccountforthefollowingprogrammes?
1. Agroceryretaileroperatesacustomerloyaltyprogramme.Itgrantsprogrammemembersloyaltypointswhenevertheyspendaspecifiedamountongroceries.Programmememberscanredeemthepointsforfurthergroceries.Thepointshavenoexpirydate.Inoneperiod,theentitygrants100points.Managementexpects80ofthesepointstoberedeemed.Managementestimatesthefairvalueofeachloyaltypointtobeonecurrencyunit(CU1).Inyear1,40pointsareredeemedinexchangeforgroceries.Inthesecondyear,managementrevisesitsexpectations.Itnowexpects90pointstoberedeemedaltogether.Duringthesecondyear,41pointsareredeemed,bringingthetotalnumberredeemedto40+41=81points.Inthethirdyear,afurtherninepointsareredeemed,takingthetotalnumberofpointsredeemedto81+9=90.Managementcontinuestoexpectthatonly90pointswilleverberedeemed,i.e.thatnomorepointswillberedeemedafterthethirdyear.
Inperiodthattheentitygrants100pointsitdefersrevenueofCU100.
Year1:Theentityrecognizesrevenueof(40points/80points)CU100=CU50.
Year2:Thetotalrevenuethattheentitynowrecognizesis(81points/90points)CU100=CU90.TheentityhasalreadyrecognizedrevenueofCU50inthefirstyear,soitrecognizesafurtherCU40inthesecondyear.
Year3:Thecumulativerevenuetodateis(90points/90points)CU100=CU100.TheentityhasalreadyrecognizedCU90ofrevenue(CU50inthefirstyearandCU40inthesecondyear).SoitrecognizestheremainingCU10inthethirdyear.Alloftherevenueinitiallydeferredhasnowbeenrecognized.
2. Aretailerofelectricalgoodsparticipatesinacustomerloyaltyprogrammeoperatedbyanairline.ItgrantsprogrammemembersonepointwitheachCU1theyspendonelectricalgoods.Programmememberscanredeemthepointsfortravelwiththeairline,subjecttoavailability.TheretailerpaystheairlineCU0,009foreachpoint.Inoneperiod,theretailersellselectricalgoodstotalingCU1million.Itgrants1millionpoints.TheretailerestimatesthatthefairvalueofapointisCU0,01.
Theentityallocates1million*CU0,01=CU10000oftheconsiderationithasreceivedfromthesalesofitselectricalgoodstothepoints.Havinggrantedthepoints,theretailerhasnofurtherobligationstothecustomer.Theairlineisobligedtosupplytheawardsandentitledtoreceiveconsiderationfordoingso.Theretailerrecognizesrevenuefromthepointswhenitsellstheelectricalgoods.Iftheretailerhascollectedtheconsiderationallocatedtotheawardcreditsonitsownaccount,itmeasuresitsrevenueasthegrossCU10000allocatedtothepoints.ItseparatelyrecognizestheCU9000paidorpayabletotheairlineasanexpense.Iftheretailerhascollectedtheconsiderationonbehalfoftheairline,i.e.asanagentfortheairline,itmeasuresitsrevenueasthenetamountitretainsonitsownaccount.ThisamountofrevenueisthedifferencebetweentheCU10000considerationallocatedtothepointsandtheCU9000passedontotheairline.
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IAS37Provisions,contingentliabilitiesandcontingentassetsED2010/1MeasurementofliabilitiesinIAS37
InstituutvandeBedrijfsrevisoren 2727oktober2010
ED 2010/1 MEASUREMENT OF LIABILITIES IN IAS 37
Anoilproductioncompanyownsandoperatesanoilrig.Existingenvironmentallawsobligerigownerstodismantlerigsthathavereachedtheendoftheirusefullives.Rigownerscannotcancelsuchobligations,ortransferthemtoathirdparty.However,therearecontractorsinthemarketthatprovidedismantlingservicesforrigowners.Acontractorwouldcharge125,000currencyunits(CU125,000)todismantletheoilcompanysrignow,inawaythatcomplieswithexistingenvironmentallaws.Therighasanestimatedremainingusefullifeof1015years.Thecurrent10yearand15yearriskfreeratesofinterestarerespectively6and5.5%peryear.
Theentityestimatestheprobabilityofeachoutcomeoccurring.Itcalculatestheprobabilityweightedaverageofthepresentvaluesforthesixoutcomes.
Outcome Usefullifeofrig Estimatedoutflow(contractorprice)
Estimatedprobability
1 10years 200,000 5%2 10years 225,000 25%3 10years 275,000 20%4 15years 230,000 5%5 15years 260,000 25%6 15years 340,000 20%
TheCU125,000thatacontractorwouldchargetodismantletherigincludesapriceforrisk,butonlyinrespectofuncertaintiesinthecoststhatthecontractorwouldincurtodismantletherignow.Itdoesnottakeintoaccounttheadditionalriskthatarisesbecauseofuncertaintyabout:
(a)howpriceswillchangebetweennowandtheendoftherigsusefullife;and(b)whentherigwillreachtheendofitsusefullife.
Theentityestimatesthatitwouldrationallypayanadditional5%toberelievedofthisrisk:
Accountfortheliability
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IAS37Provisions,contingentliabilitiesandcontingentassetsED2010/1MeasurementofliabilitiesinIAS37
InstituutvandeBedrijfsrevisoren 2827oktober2010
Measurementbasis:Becausetheoilcompanycannottransferorcancelitsobligation,itneednotconsidertheamountsitwouldhavetopaytodoso.Itmeasurestheliabilityasthepresentvalueoftheresourcesrequiredtofulfilltheobligation.
Outflowsofresources:Estimatesoffuturepriceincreasestakeintoaccountpossiblemarketandtechnologicaldevelopments.Theentityestimatestheprobabilityofthesedevelopmentsoccurringonthebasisofexperience,marketdata,technologicalinformationandsimilarevidence.Theestimatesoffuturepricesarebasedonexistinglegalrequirements:theydonottakeintoaccountthepossibilitythatthelegalrequirementswillbemoreonerousattheendoftherigsusefullifethantheyareatpresent.
Outcome Estimatedoutflow(contractorprice)
Discountedvalue(6%foroutcome1,2,3;5.5%foroutcome4,5,6)
Estimatedprobability
Weightedamount
1 200,000 111,679 5% 5,5842 225,000 125,639 25% 31,4103 275,000 153,559 20% 30,7124 230,000 103,025 5% 5,1515 260,000 116,463 25% 29,1166 340,000 152,297 20% 30,459Expectedpresentvalueofoutflows 132,432Riskadjustment(5%) 6,622Amountthattheentitywouldrationallypayattheendofthereportingperiodtoberelievedoftheobligation
139,054