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Chapter 3 Accounting for Provisions, Contingencies andEvents after the Reporting Period
LEARNING OBJECTIVES
1. Define and identify provisions ( ), contingent liabilities ( ) and contingent
assets () (IAS 37).
2. Eplain t!e re"#ire$ents of IAS 37 in relation to t!e acco#nting treat$ent of
contingencies in t!e financial state$ents and t!eir disclos#res.
3. Define events after t!e reporting period.
%. Identify adsting and non'adsting events after t!e reporting period.
. Eplain t!e re"#ire$ents of IAS 1 in relation to acco#nting for events after t!ereporting period and t!eir disclos#res.
A d & # s t i n g
E v e n t s
* o n ' a d & # s t i n g
E v e n t s
D i s c l o s # r e s
I A S 1 )
D i s c l o s # r e s
A p p l i c a t i o n o f t ! e
+ # l e s t o S p e c i f i c
, i r c # $ s t a n c e s
, ! a n g e s i n
- r o v i s i o n s
. e a s # r e $ e n t
+ e c o g n i t i o n
I n t r o d # c t i o n
I A S 3 7
2. Provisions
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2.1 The nature of provisions
2.1.1 efinition
-rovisions are liabilities for 0!ic! t!e a!ount or ti!in"of t!e ependit#re t!at 0ill
be #ndertaen is un#ertain().
2.1.2 It believes t!at provisions are a su$ #%ass of %ia$i%itiesand not a separate ele$ent of
t!e balance s!eet. &rovisions are 'istin"uishe' fro! other %ia$i%ities $( the
un#ertainties invo%ve'.
2.1.3 !is definition is significant beca#se it $eans t!at provisions !ust a%so !eet the
'efinition of %ia$i%ities, i.e., there !ust $e an o$%i"ation to transfer e#ono!i#
$enefits. !e reasoning be!ind t!e $ain re"#ire$ents in IAS 37 is t!at recogniing a
provision for ite$s t!at are not liabilities 0o#ld a$o#nt to bias rat!er t!an pr#dence
and 0o#ld i$pair t!e #sef#lness of t!e financial state$ents.
2.1.% E)a!p%e 1
rade payables are liabilities to pay for goods t!at !ave been s#pplied4 !o0ever,
trade payables are not provision.
!e ter$s and conditions, incl#ding price and delivery of goods !ave been for$ally
agreed 0it! t!e s#pplier at t!e ti$e of placing order 0it! t!e s#pplier. !ere s!o#ld
!ave s#fficient certainty regarding t!e a$o#nt and ti$ing of settle$ent for t!is
transaction.
2.1. E)er#ise 1
Eplain 0!y accr#als for electricity are liability b#t not provisions.
So%ution*
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2.2 S#ope of IAS +,
2.2.1 IAS 37 does not cover t!ose provisions, contingent liabilities and contingent assets
t!at5
(i) res#lt fro$ financial instr#$ents t!at are carried at fair val#es4
(ii) res#lt fro$ eec#tory contracts, ecept 0!ere t!e contract is onero#s4
(iii) arise in ins#rance enterprises fro$ contracts 0it! policy!olders4 and
(iv) are covered by anot!er IASs (e.g., IAS 12, IAS 11).
2.+ Re#o"nition
2.3.1 Re#o"nition #riteria
A provision s!o#ld be re#o"ni-e'0!en5
(a) an enterprise !as a present obligation (legal or constr#ctive) as a res#lt of a
past event ()4
(b) it is probable t!at an o#tflo0 of reso#rces e$bodying econo$ic benefits 0ill
be re"#ired to settle t!e obligation (
)4 and
(c) a reliable esti$ate can be $ade of t!e a$o#nt of t!e obligation (
).
2.3.2 !e follo0ing decision tree is to s#$$arise t!e $ain recognition re"#ire$ents of t!e
Standard for provisions and contingent liabilities.
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(a) First criterion present obligation as a result of a past event
2.3.3 !e present obligation $ay be5
(a) a %e"a% o$%i"ation(), or
(b) #onstru#tive o$%i"ation(),
0!ere eist 0!en t!e enterprise !as no realistic alternative to settling t!e obligation
created by t!e event.
2.3.% efinitions
(a) A %e"a% o$%i"ation is an obligation t!at arises fro! a #ontra#t (t!ro#g! its
eplicit or i$plicit ter$), %e"is%ation or other operation of %a, and t!e
obligation arises only 0!en t!e legislation is virt#ally certain to be enacted as
drafted.
(b) A present o$%i"ationarising ot!er t!an fro$ a contract, legislation or ot!er
operation of t!e la0 is called a constr#ctive obligation. S#c! obligation arises
fro! an enterprise/s a#tions on%(, for ea$ple, by an esta$%ishe' pattern of
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past pra#ti#e or pu$%ishe' po%i#ies. !e enterprise !as indicated to ot!er
parties t!at it 0ill accept certain responsibilities, as a res#lt, t!e enterprise !as
#reate' a va%i' e)pe#tationon t!e part of t!ose ot!er parties (e.g. c#sto$ers,
s#ppliers, e$ployees) t!at it 0ill disc!arge t!ose responsibilities.
2.3. !e past event t!at leads to a present obligation is called an o$%i"atin" event 0, i.e., it creates a legal or constr#ctive obligation t!at resu%ts in an enterprise
havin" no rea%isti# a%ternative to sett%in" that o$%i"ation . 6nly t!ose obligations
arising fro$ past events eisting independently of an enterprises f#t#re actions t!at
are recognied as provisions.
2.3.8 6n t!e ot!er !and, if t!e enterprise #an avoi' the future outf%o of resour#es
e!$o'(in" e#ono!i# $enefits $( its future a#tions no o$%i"atin" event e)ists an'
thus no provision shou%' $e re#o"ni-e'. In t!e past, so$e enterprises !ave
recognied provisions i$$ediately t!at t!e need for a progra$$e of ependit#re !as
been identified, based on gro#nds of pr#dence.
2.3.7 E)a!p%e 2 3 Overhau% #osts 0o$%i"atin" events 'oes not e)ist
I9 Air0ays is re"#ired #nder t!e legislation of o#ntry + to over!a#l its aircraft once
every t!ree years.
No provisionfor t!e over!a#l costs s!o#ld be recognied. Even a legal re"#ire$ent
to over!a#l does not $ae t!e costs of over!a#l a liability, beca#se no obligation
eists to over!a#l t!e aircraft independently of t!e enterprises f#t#re actions. !e
over!a#l ependit#re can be avoi'e' $( IJ Aira(s/ future a#tions, say by selling
t!e aircraft, so t!ere is no present obligation for t!e f#t#re ependit#re.
2.3.: !e follo0ing ea$ples fro$ IAS 37, 0it! so$e $odifications, are #sed for
ill#stration.
2.3./ E)a!p%e + 3 Conta!inate' %an' 0%e"a% o$%i"ation
A;
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re"#iring cleaning #p.
An outf%o of resour#es e!$o'(in" e#ono!i# $enefits in sett%e!ent> -robable.
Con#%usion> A provision is recognised for t!e best esti$ate of t!e costs of t!e clean'
#p.
2.3.1 E)er#ise 2 3 Conta!inate' %an' 0#onstru#tive o$%i"ation
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2.3.11 E)a!p%e 5 3 C%osure of a 'ivision 0no i!p%e!entation on or $efore $a%an#e sheet
'ate
6n 18 Dece$ber 211 t!e board of E
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(b) Second criterion probable outflow of economic resources embodying
economic benefits
2.3.13 An o#tflo0 of reso#rces is regarded as pro$a$%eif t!e o#tflo0 is $ore liely t!an not
to occ#r (i.e. !aving a pro$a$i%it( "reater than 789).
2.3.1% E)a!p%e 7 3 :arranties 0 * -robable
for t!e 0arranties as a 0!ole.
Con#%usion> A provision is recognised for t!e best esti$ate of t!e costs of $aing
good #nder t!e 0arranty prod#cts sold before t!e balance s!eet date.
(c) Third criterion reliable estimate of the obligation amount
2.3.1 IAS 37 states t!at a s#fficiently reliable esti$ate of t!e a$o#nt of obligation can be
$ade, a provision is to be recognied. 6nly in etre$ely rare cases 0ill it be
gen#inely i$possible to $ae a reliable esti$ate and a provision eists t!at cannot be
recognied. In t!is case, t!at liability s!o#ld be disclosed as a contingent liability.
2.5 ;easure!ent
2.%.1
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(i) ris=s an' un#ertaintiesassociated 0it! t!e cas! flo0s
(ii) e)pe#te' future events (for ea$ple, ne0 tec!nology or ne0
legislation)
(iii) 'is#ountin"0!enever t!e effect of t!is is $aterial.(c) If t!e effect of t!e ti$e val#e of $oney is $aterial, t!en t!e provision s!o#ld
be disco#nted. !e 'is#ount rate shou%' $e pre>ta) an' ris= spe#ifi#. !e
ta conse"#ences of t!e provision are dealt 0it! in accordance 0it! IAS 12
CAcco#nting for Deferred a.
(d) !e unin'in" of the 'is#ount is a finan#e #ost , and it s!o#ld be disclosed
separately on t!e face of t!e state$ent of co$pre!ensive inco$einco$e
state$ent.
(e) -rovisions s!o#ld be reviee' at ea#h reportin" 'ateand adsted to reflectt!e c#rrent best esti$ate.
2.%.2 E)a!p%e ? 3 eter!ine the a!ount of provisions for a %ar"e popu%ation
6-
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deco$$issioning !as to be set #p.
Re4uire'*
Eplain 0it! reasons and s#itable etractsco$p#tations t!e acco#nting treat$ent of t!e
above sit#ation in t!e financial state$ents for t!e year ended 31 ay 2%. (: $ars)
(Adapted AA 3.8 Advanced orporate +eporting 9#ne 2% 3(b)(i))
2.7 Spe#ifi# app%i#ations in pra#ti#e
2..1 IAS 37 f#rt!er eplains !o0 t!e general recognition and $eas#re$ent principles for
provisions s!o#ld be applied in t!ree specific cases in practice5
(a) f#t#re operating losses4
(b) onero#s contracts ()4
(c) environ$ental provisions4 and
(d) restr#ct#ring costs.
(a) Future operating losses
2..2 In t!e past, provisions !ave so$eti$es been recognied for f#t#re operating losses on
t!e gro#nds of pr#dence. *o0, no provisions shou%' $e re#o"ni-e' for future
operatin" %osses. !ose costs co#ld be avoided by t!e enterprises f#t#re actions4 t!#s
t!ey do not $eet t!e definition of a liability and t!e general recognition criteria for a
provision.
(b) Onerous contracts
2..3 An onero#s contract is a contract entered into 0it! anot!er party #nder 0!ic! t!e
#navoidable costs of f#lfilling t!e ter$s of t!e contract eceed any reven#es epectedto be received fro$ t!e goods or services s#pplied and 0!ere t!e entity 0o#ld !ave to
co$pensate t!e ot!er party if it did not f#lfill t!e ter$s of t!e contract. !e present
obligation #nder an onero#s contract s!o#ld be recognied and $eas#red as a
provision.
2..% E)a!p%e , 3 Onerous #ontra#t
Droopers plc !as recently bo#g!t all of t!e trade, assets and liabilities of Dolittle, an
#nincorporated b#siness. As part of t!e tae'over all of t!e co$bined b#sinesss
:
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activities !ave been relocated at Droopers $ain site. As a res#lt Dolittles pre$ises
are no0 e$pty and s#rpl#s to re"#ire$ents.
?o0ever, st before t!e ac"#isition Dolittle !ad signed a t!ree year lease for t!eirpre$ises at F8, per calendar $ont!. At 31 Dece$ber 21 t!is lease !ad 32
$ont!s left to r#n and t!e landlord !ad ref#sed to ter$inate t!e lease. A s#b'tenant
!ad taen over part of t!e pre$ises for t!e rest of t!e lease at a rent of F2, per
calendar $ont!.
Re4uire'*
(a) S!o#ld Droopers recognie a provision for an onero#s contract in respect of
t!is lease@
(b) S!o0 !o0 t!is infor$ation 0ill be presented in t!e financial state$ents for
21 and 211. Ignore t!e ti$e val#e of $oney.
So%ution*
(a) Droopers plc !as a legal obligation to pay a f#rt!er F1/2, (F8, 32
$ont!s) to t!e landlord, as a res#lt of a lease signed before t!e year end.
!erefore an onero#s contract eists and $#st be provided for.
!ere is also an a$o#nt recoverable fro$ t!e s#b'tenant of F:, (F2,
32 $ont!s). !is 0ill be s!o0n separately in t!e balance s!eet as an asset.
!e F1/2, payable and t!e F:, recoverable can be netted off in t!e
inco$e state$ent.
(b)
In#o!e state!ent 21 211F F
-rovision for onero#s contract (net) 112, Dr '
*et rental payable on lease (72 > 3) ' %2, Dr
+elease of provision %2, r
112, Dr '
State!ent of finan#ia% position
+eceivables
A$o#nt recoverable fro$ s#b'tenants :, Dr , Dr
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2..7 E)a!p%e 3 Environ!enta% provision #ost
6n 1 9an#ary 212, A; paid t!e Bovern$ent of F$ for a t!ree'year licence to
"#arry gravel. At t!e end of t!e licence, A; $#st restore t!e "#arry to its nat#ral
state. !is 0ill cost a f#rt!er F3$. !ese costs 0ill be inc#rred on 1 9an#ary 21.
A;s cost of capital is 1G.
Eplain !o0 t!is ependit#re is treated in t!e financial state$ents of A;.
So%ution*
A; !as a legal obligation (t!e obligating event is t!e taing o#t of t!e licence).
!erefore, it recognies a provision for F3$ at 1 9an#ary 212. !is provision is
disco#nted to its present val#e.
Eac! year, t!e disco#nt #n0inds and t!e provision increases. !e #n0inding of t!e
disco#nt is c!arged to profit as a finance cost.
;ove!ent on provision 2812 281+ 2815 2817
888 888 888 888
6pening balance 2,23 2,%7: 2,727 3,
inance cost at 1G 22 2%/ 273 '
+elease ' ' ' (3,)
losing balance 2,%7: 2,727 3, '
A; co#ld not carry o#t its "#arrying operation 0it!o#t inc#rring t!e clean'#p costs.
!erefore, in#urrin" the #osts "ives it a##ess to future e#ono!i# $enefits. It
incl#des t!e additional ependit#re in t!e cost of t!e licence and recognies t!is as an
asset. !e licence is depreciated over t!e t!ree years.
ost of licence F
as! paid 1 9an#ary 212 ,
-K of clean'#p costs at 1 9an#ary 212 2,23
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otal 7,23
!e effect on t!e financial state$ents is s!o0n belo0.
In#o!e state!ent 2812 281+ 2815 2817
888 888 888 888
Operatin" #osts
Depreciation (over 3 years) 2,%1: 2,%1: 2,%17 '
inan#e #osts
Ln0inding of disco#nt 22 2%/ 273 '
State!ent of finan#ia% position
Non>#urrent assets
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2..11 It re"#ires t!at provisions for reorganiationrestr#ct#ring s!o#ld be recognied only
0!en an entity is de$onstrably co$$itted to t!e reorganiation, i.e., specific actions
$#st !ave been taen so t!at ot!ers can be epected to act on t!e basis t!at t!e
reorganiation 0ill proceed and in so doing, leave t!e entity 0it!o#t realistic
possibility of 0it!dra0al.
2..12
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invest$ent in ne0 syste$s and distrib#tion net0ors, etc., beca#se t!ese
ependit#res relate to t!e f#t#re operation of t!e enterprise and are not
liabilities for restr#ct#ring at t!e reporting date.
2..1% E)a!p%e D
6n 1 9an#ary 212 t!e ;oard of Directors of S!ane Alt!o#g! t!e clos#re 0ill not begin #ntil 9#ly, t!e e$ployees 0ill !ave
!ad a valid epectation t!at it 0o#ld !appen 0!en t!e red#ndancy negotiations began
in arc!. !erefore a provision s!o#ld be recognised. !e provision 0ill be for
F1, beca#se t!e epected profit on disposal cannot be netted off against t!e
epected costs.
8%
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2..1 E)er#ise 5 3 ;easurin" restru#turin" provisions
6n 1 6ctober 27 t!e ;oard of *
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@uestion 2
=ader !as decided to close one of its overseas branc!es. A board $eeting 0as !eld on 3
April 27 0!en a detailed for$al plan 0as presented to t!e board. !e plan 0as for$alised
and accepted at t!at $eeting.
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3. Contingent Liabilities and Contingent Assets
+.1 Contin"ent %ia$i%ities
3.1.1 efinition
A #ontin"ent %ia$i%itiesis defined in IAS 37 as5
(a) a possi$%eobligation t!at arise fro! past eventsand hose e)isten#e i%% $e
#onfir!e' on%( $( the o##urren#e or non>o##urren#e of one or !ore
un#ertain future eventsnot ho%%( ithin the #ontro% of the enterprise4 or
(b) a present obligation t!at arises fro! past events b#t is not re#o"ni-e'
beca#se it is not pro$a$%et!at an outf%o of resour#ese$bodying econo$ic
benefits 0ill be re"#ired to settle t!e obligation4 or the a!ount of t!e
o$%i"ation #annot $e !easure'0it! s#fficient reliability.
3.1.2 A provision and contingent liability is disting#is!ed on t!e basis t!at an enterprise
s!o#ld never re#o"ni-e a #ontin"ent %ia$i%it(. ?o0ever, a contingent liability s!o#ld
be 'is#%ose' in the notes to a##ounts, #nless t!e possibility of an o#tflo0 of
reso#rces e$bodying econo$ic benefits is re$ote.
3.1.3 E)a!p%e 18 3 Contin"ent %ia$i%ities
(i) -ending or t!reatened litigation needs to be disclosed. !e nat#re
of t!e litigation $ay tae $any for$s, s#c! as da$age to t!e environ$ent
(e.g. poll#ting air, rivers, etc.)
(ii) B#arantees > o$panies often g#arantee t!e liabilities of ot!ers. or
ea$ple, co$panies (#s#ally 0it!in a gro#p) often g#arantee eac! ot!ers
ban borro0ings or overdrafts.
(iii) Disco#nted bills > If t!e co$pany !as disco#nted bills of ec!ange 0it!
reco#rse, t!ere is al0ays t!e possibility t!at t!e co$pany 0ill be called #ponto !ono#r its pro$ise.
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+.2 Contin"ent assets
3.2.1 efinition
A #ontin"ent assetis defined as a possi$%e asset t!at arises fro! past events and
0!ose e)isten#e i%% $e #onfir!e' on%( $( the o##urren#e or non>o##urren#e of
one or !ore un#ertain future events not ho%%( ithin the #ontro% of t!e
enterprise.
3.2.2 ontingent assets are not re#o"ni-e' in finan#ia% state!entsbeca#se to do so co#ld
res#lt in t!e recognition of inco$e t!at $ay never be realied. A contingent asset is to
be disclosed 0!ere an inflo0 of econo$ic benefits is probable.
3.2.3 !e acco#ntingdisclos#re re"#ire$ents are s#$$aried in t!e follo0ing table5
e"ree of pro$a$i%it( of an
outf%o6inf%o of resour#es
Outf%o Inf%o
Kirt#ally
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o$pensation agree$ents !ad been arranged 0it! t!e victi$s, and t!ese clai$s 0ere all
covered by Breenies ins#rance policy. In eac! case, co$pensation paid by t!e ins#rance
co$pany 0as s#b&ect to a 0aiver of any dicial proceedings against Breenie and itsins#rers. If any co$pensation is event#ally payable to t!ird parties, t!is is epected to be
covered by t!e ins#rance policies.
!e directors of Breenie felt t!at t!e conditions for recognising a provision or disclosing a
contingent liability !ad not been $et. !erefore, Breenie did not recognise a provision in
respect of t!e accident nor did it disclose any related contingent liability or a note setting o#t
t!e nat#re of t!e accident and potential clai$s in its financial state$ents for t!e year ended
3 *ove$ber 21.
Re4uire'*
Disc#ss !o0 t!e above financial transaction s!o#ld be dealt 0it! in t!e financial state$ents
of Breenie for t!e year ended 3 *ove$ber 21. (8 $ars)
AA -2 orporate +eporting Dece$ber 21 3(a))
4. Disclosure Reuire!ents
5.1 &rovision
%.1.1 or eac! class of provision, t!e follo0ing disclos#res are re"#ired5
(a) a $ove$ent sc!ed#le reconciling t!e carrying a$o#nt of beginning balance to
t!e carrying a$o#nt ending balance for t!e period, disclosing5
additional provisions, incl#ding increases to eisting provisions4
a$o#nts #sed (i.e., inc#rred and c!arged against t!e provision)4
#n#sed a$o#nts reversed4 and t!e increase in t!e disco#nted a$o#nt arising fro$ t!e passage of ti$e
and t!e effect of any c!ange in t!e disco#nt rate4
(b) a brief description of t!e nat#re of t!e obligation and t!e epected ti$ing of
any res#lting o#tflo0 of econo$ic reso#rces4
(c) an indication of t!e #ncertainties abo#t t!e a$o#nt or ti$ing of t!ose o#tflo04
and
(d) t!e a$o#nt of any epected rei$b#rse$ent, starting t!e a$o#nt of any asset
t!at !as been recognied for t!at epected rei$b#rse$ent.
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5.2 Contin"ent %ia$i%it(
%.2.1 =!ere a contingent liability is disclosed, t!e enterprise is to provide a brief description
of t!e nat#re of t!e contingent liability. In addition, t!e follo0ing infor$ation is
re"#ired5
(a) an esti$ate of its financial effect4
(b) an indication of t!e #ncertainties relating to t!e a$o#nt or ti$ing of any
o#tflo04 and
(c) t!e possibility of any rei$b#rse$ent.
5.+ Contin"ent asset
%.3.1 =!ere a contingent asset is disclosed, t!e follo0ing infor$ation is re"#ired5
(a) a brief description of t!e nat#re of t!e contingent asset4 and
(b) an esti$ate of its financial effect > 0!ere t!is is not disclosed beca#se it is not
practicable to do so, t!at fact s!o#ld be stated.
%.3.2 !e ent! Sc!ed#le to t!e o$panies 6rdinance also re"#ires t!at 0!ere
contingencies !ave not been provided for in t!e financial state$ents, t!e follo0ing
infor$ation s!o#ld be disclosed5
(a) t!e general nat#re of any ot!er contingent liabilities not provided for4 and
(b) 0!ere practicable, t!e aggregate a$o#nt or esti$ated a$o#nt of t!ose
liabilities, if it is $aterial.
". Events after the Reporting Period
.1 efinitions
(a) Events after t!e reporting period are t!ose events, bot! favo#rable and
#nfavo#rable, t!at occ#r bet0een t!e reporting date and t!e date on 0!ic! t!e
financial state$ents are a#t!oried for iss#e (
).
(b) !ere are t0o types of s#c! events5
(i) a'ustin" events 0 > t!ose providing f#rt!er evidence ofconditions t!at eisted at t!e end of t!e reporting period. !ese events
$#st be adsted for in t!e financial state$ents.
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(ii) non>a'ustin" events 0 > t!ose t!at are indicative ofconditions t!at arose after t!e reporting period. !ese do not re"#ire
re"#ire$ent, b#t $#st be disclosed by note or ot!er0ise if $aterial.
.2 In so$e cases, an entity is re"#ired to s#b$it its financial state$ents to its
s!are!olders for approval after t!e financial state$ents !ave been iss#ed. In s#c!
cases, t!e financial state$ents are a#t!orised for iss#e on t!e date of iss#e, not t!e date
0!en s!are!olders approve t!e financial state$ents.
.3 E)a!p%e 11
!e $anage$ent of an entity co$pletes draft financial state$ents for t!e year to 31
Dece$ber 27 on 2: ebr#ary 2:. 6n 1: arc! 2:, t!e board of directors
revie0s t!e financial state$ents and a#t!orises t!e$ for iss#e. !e entity anno#nces
its profit and selected ot!er financial infor$ation on 1/ arc! 2:. !e financial
state$ents are $ade available to s!are!olders and ot!ers on 1 April 2:. !e
s!are!olders approve t!e financial state$ents at t!eir ann#al $eeting on 1 ay
2: and t!e approved financial state$ents are t!en filed 0it! a reg#latory body on
17 ay 2:.
!e financial state$ents are a#t!orised for iss#e on 1: arc! 2: (date of boarda#t!orisation for iss#e).
.% In so$e cases, t!e $anage$ent of an entity is re"#ired to iss#e its financial state$ents
to a s#pervisory board ($ade #p solely of non'eec#tives) for approval. In s#c! cases,
t!e financial state$ents are a#t!orised for iss#e 0!en t!e $anage$ent a#t!ories
t!e$ for iss#e to t!e s#pervisory board.
. E)er#ise 76n 1: arc! 2:, t!e $anage$ent of an entity a#t!orises financial state$ents for
iss#e to its s#pervisory board. !e s#pervisory board is $ade #p solely of non'
eec#tives and $ay incl#de representatives of e$ployees and ot!er o#tside interests.
!e s#pervisory board approves t!e financial state$ents on 28 arc! 2:. !e
financial state$ents are $ade available to s!are!olders and ot!ers on 1 April 2:.
!e s!are!olders approve t!e financial state$ents at t!eir ann#al $eeting on 1 ay
2: and t!e financial state$ents are t!en filed 0it! a reg#latory body on 17 ay
2:.
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=!en is t!e date of a#t!oriation for t!e iss#ance of financial state$ents@
7.? E)a!p%es of a'ustin" events
.8.1 !e follo0ing ea$ples are nor$ally classified as adsting events5
(a) ied assets > t!e s#bse"#ent deter$ination after t!e reporting period of t!e
p#rc!ase price or sales proceeds of assets p#rc!ased or sold before balance
s!eet date.
(b) I$pair$ent > t!e receipt of infor$ation after t!e reporting period indicating
t!at an asset 0as i$paired at t!e balance s!eet date.
(c) -rovision > t!e resol#tion after t!e reporting period of a co#rt case 0!ic!,
beca#se it confir$s t!at an enterprise already !ad a present obligation at t!e
balance s!eet date, re"#ires an enterprise to recognie a provision.
(d) -rofit s!aring or bon#s pay$ents > t!e deter$ination after t!e reporting period
of t!e a$o#nt of profit s!aring or bon#s pay$ents, if an enterprise already !ad
a present obligation at t!e reporting date to $ae s#c! pay$ents as a res#lt of
event before t!at date.
(e) Discoveries > t!e discovery of significant errors or fra#ds t!at render t!e
financial state$ents incorrect or $isleading.
.8.2 E)a!p%e 12
A $a&or c#sto$er 0ent into li"#idation on 28 April 2:. !e c#sto$ers balance at
31 arc! 2: re$ains #npaid. !e receiver !as inti$ated t!at #nsec#red payables
0ill receive very little co$pensation, if any.
Re4uire'*
Eplain !o0 t!e above $atter s!o#ld be dealt 0it! in t!e financial state$ents for t!eyear ended 31 arc! 2:.
So%ution*
!e $a&or c#sto$er 0ent into li"#idation 28 April 2: and it is no0 clear t!at t!is
balance is not recoverable. !e li"#idation is t!erefore an adsting event, and t!e
a$o#nt of bad debt s!o#ld be 0ritten off in t!e co$panys financial state$ent for t!e
year ended 31 arc! 2:.
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7., E)a!p%es of non>a'ustin" events
.7.1 !e follo0ing ea$ples are classified as non'adsting events5
(a) ;#siness co$binations
(b) +estr#ct#ring
(c) Discontin#ing operations
(d) -#rc!ases or disposal of assets
(e) ire
(f) S!are transactions
(g) oreign ec!ange > abnor$al large c!anges in asset prices or foreign ec!ange
rates
(!) a > c!anges in ta ratesla0s
(i) o$$it$ents or contingent liabilities
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.7.3 E)er#ise ?
IAS 1 reg#lates t!e etent to 0!ic! events after t!e reporting period s!o#ld be
reflected in financial state$ents.
=!ic! of t!e follo0ing lists of s#c! events, 0!ic! offers after t!e end of t!e
reporting period b#t before t!e approval of financial state$ents, consists only of
ite$s t!at, according to IAS 1 s!o#ld nor$ally be classified as non'adsting@
1. Insolvency of a debtor 0!ose acco#nt receivable 0as o#tstanding at end of
t!e reporting period.
2. Iss#e of s!ares or loan notes.
3. !anges in foreign ec!ange rates 0!ic! relates to sales before end of t!e
reporting period.
%. A $a&or $erger 0it! anot!er co$pany.
. Destr#ction of a $a&or non'c#rrent asset by fire.
So%ution*
7. Other re%ate' issues
(a) ate of authori!ation for issue
.:.1 An enterprise is re"#ired to disclose5
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(a) t!e date 0!en t!e financial state$ents 0ere a#t!oried for iss#e, and
(b) 0!o gave t!at a#t!oriation.
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(b) "roposed dividends
.:.2 6rdinary s!are dividends t!at are proposed or declared after t!e balance s!eet date
s!o#ld not be recognied as a liability in t!e balance s!eet. !e reason is t!at s#c!
proposed dividends do not $eet t!e recognition criteria of a liability. !e enterprise
does not !ave a present obligation at t!e balance s!eet date in respect of dividends
proposed or declared after t!e balance s!eet date.
.:.3 !ese dividends s!o#ld be disclosed in a note to t!e financial state$ents.
(c) #oing concern
.:.% IAS 1 provides t!at an enterprise s!o#ld not prepare its financial state$ents on a
going concern basis if $anage$ent deter$ines after t!e balance s!eet date eit!er t!at
it intends to li"#idate t!e enterprise or to cease trading, or t!at is !as no realistic
alternative b#t to do so.
.:. ?o0ever, it is i$portant to note t!at financial state$ents s!o#ld not be adsted 0!ere
an event after t!e balance s!eet date indicates t!at t!e going concern ass#$ption is not
appropriate only for part of t!e enterprise.
7.D is#%osure re4uire!ents
(a) $d%usting events
./.1 Separate disclos#re of adsting events is not re"#ired as t!ey do not $ore t!an
provide additional evidence in s#pport of ite$s already recognied in t!e financial
state$ents.
(b) &on'ad%usting events
./.2 In respect of eac! non'adsting post balance s!eet event 0!ic! is re"#ired to be
disclosed (i.e. $aterial), t!e follo0ing infor$ation s!o#ld be stated by 0ay of notes to
t!e financial state$ents5
(a) t!e nat#re of t!e event, and
(b) t!e esti$ate of t!e financial effect, or a state$ent t!at it is not practicable to
$ae s#c! an esti$ate.
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A''itiona% E)a!ination St(%e @uestions
@uestion 5
Delta is an entity t!at prepares financial state$ents to 31 arc! eac! year. D#ring t!e year
ended 31 arc! 212 t!e follo0ing events occ#rred5
(a) 6n 1 April 211, Delta p#rc!ased so$e land for F1 $illion. Delta p#rc!ased t!e land
in order to etract $inerals fro$ it. D#ring t!e si $ont!s fro$ 1 April 211 to 3
Septe$ber 211, Delta inc#rred costs totaling F3M $illion in preparing t!e land and
erecting etraction e"#ip$ent. !is process ca#sed so$e da$age to t!e land. Delta
began etracting t!e $inerals on 1 6ctober 211 and t!e directors esti$ate t!at t!ere
are s#fficient $inerals to enable t!e site to !ave a #sef#l econo$ic life of 1 years fro$
t!at date. #rt!er da$age to t!e land is ca#sed as t!e $inerals are etracted.
Delta is legally obliged to rectify t!e da$age ca#sed by t!e preparation and $ineral
etraction. !e directors esti$ate t!at t!e costs of t!is rectification on 3 Septe$ber
221 0ill be as follo0s5
(i) F3 $illion to rectify t!e da$age ca#sed by t!e preparation of t!e land.
(ii) F2, for eac! year of t!e etraction process to rectify da$age ca#sed by t!e
etraction process itself.
ollo0ing t!is rectification 0or t!e land co#ld potentially be sold to a t!ird party for
no less t!an its original cost of F1 $illion.
An ann#al disco#nt rate appropriate for t!is pro&ect is 12G. !e present val#e of F1
payable in 1 years ti$e 0it! an ann#al disco#nt rate of 12G is 32M2 cents. !e present
val#e of F1 payable in /N years ti$e 0it! an ann#al disco#nt rate of 12G is 3%M1 cents.
(/ $ars)
(b) At 31 arc! 212, Delta 0as engaged in a legal disp#te 0it! a c#sto$er 0!o allegedt!at Delta !ad s#pplied fa#lty prod#cts t!at ca#sed t!e c#sto$er act#al financial loss.
!e directors of Delta consider t!at t!e c#sto$er !as a 7G c!ance of s#cceeding in
t!is action and t!at t!e liely o#tco$e s!o#ld t!e c#sto$er s#cceed is t!at t!e c#sto$er
0o#ld be a0arded da$ages of F1 $illion. !e directors of Delta f#rt!er believe t!at t!e
fa#lt in t!e prod#cts 0as ca#sed by t!e s#pply of defective co$ponents by one of
Deltas s#ppliers. Delta !as initiated legal action against t!e s#pplier and considers t!ere
is a 7G c!ance Delta 0ill receive da$ages of F:, fro$ t!e s#pplier. Ignore
disco#nting in t!is part of t!e "#estion. (3 $ars)
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(c) 6n 1 April 212, a 0ater lea at one of Deltas 0are!o#ses da$aged a consign$ent of
inventory. !is inventory !ad been $an#fact#red prior to 31 arc! 212 at a total cost
of F:,. !e net realisable val#e of t!e inventory prior to t!e da$age 0as esti$ated
at F/8,. ;eca#se of t!e da$age Delta 0as re"#ired to spend a f#rt!er F1, on
repairing and re'pacaging t!e inventory. !e inventory 0as sold on 1 ay 212 for
proceeds of F/,. Any adst$ent in respect of t!is event 0o#ld be regarded by
Delta as $aterial. (3 $ars)
Re4uire'*
Eplain and s!o0 !o0 t!e t!ree events 0o#ld be reported in t!e financial state$ents of Delta
for t!e year ended 31 arc! 212.
(AA Diplo$a in Intl inancial +eporting 9#ne 212 2(a),(c) and (d))