ch3 provisions

8/13/2019 Ch3 Provisions

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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

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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.

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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

(&)


26/30

.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))

ch3 provisions

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