However, it has come to light that Rey Co may have a counter claim against the manufacturer of the machinery. For some ACCA candidates, specific IFRS® standards are more favoured than others. This is where a company establishes an expectation through an established course of past practice. Finally, it will examine some specific issues which are often assessed in relation to the standard. This should be debited to the statement of profit or loss, with a liability of $9.09m recorded. Note: Your answer should briefly set out the nature of financial capital in integrated reports. The Board proposes no new re­quire­ments for entities to disclose in­for­ma­tion about onerous contracts. Past experience shows that Rey Co needs to do no repairs on 85% of the goods. Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation. Instead, a description of the event should be given to the users with an estimate of the potential financial effect. However, IAS 37 is often a key standard in FR exams, and candidates must be prepared to wrestle with applying the criteria. This obligation has a present value of $20m. In addition to this, the expected timing of when the event should be resolved should also be included. That is because there is no past event which has created the obligation. Rey Co’s legal advisors continue to believe that it is likely that Rey Co will lose the court case against the employee and have to pay out $10m. IAS 37 – provisions and contingent liabilities – ACCA Financial Reporting (FR) It will not be uncommon to take the $12m, thinking that the worst-case scenario should be provided for. Most candidates are able to spot this in exams, identifying the presence of a potential obligation of this type. The final criteria required is that there needs to be a probable outflow of economic resources. C2. IAS 33 EPS - Number of shares. Rey Co could not provide for any possible claims which may arise from injuries in the future. Onerous contracts are those in which the costs of meeting the contract will exceed any benefits which will flow to the entity from the contract. The objective of IAS 37 is to ensure that ap­pro­pri­ate recog­ni­tion criteria and mea­sure­ment bases are applied to pro­vi­sions, con­tin­gent li­a­bil­i­ties and con­tin­gent assets and that suf­fi­cient in­for­ma­tion is disclosed in the notes to the financial state­ments to enable … If the employees have not been informed, then the company could change its mind. This is effectively an attempt to move $3m profit from the current year into the next period. ACCA P2 Provisions, contingent assets and liabilities (IAS 37) Free lectures for the ACCA P2 Corporate Reporting Exams Over the useful life of the asset, the $170m will be depreciated. Like a contingent liability, a contingent asset is simply disclosed rather than a double entry being recorded. Over the useful life of the asset, the $170m will be depreciated. A probable outflow simply means that it is more likely than not that the entity will have to pay money out. In reality a virtually certain inflow is unlikely. According to IAS 37, 3 criteria are required to be met before a provision can be recognised. This is where a company establishes an expectation through an established course of past practice. The first is to assess whether an obligation exists at the reporting date. So far, all of the items considered in this article have involved the provision being recorded as a liability with the debit being shown as an expense in the statement of profit or loss. These are: These criteria will now be examined in further detail to see how they can be applied in practice. This should be debited to the statement of profit or loss, with a liability of $9.09m recorded. As part of obtaining permission to construct the platform, Rey Co has a legal obligation to remove the asset at the end of its useful life. 2. Even if the country has no legal regulations forcing Rey Co to replant trees, Rey Co will have a constructive obligation because it has created an expectation from its publications, practice and history. IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains requirements on how to measure decommissioning, restoration and similar liabilities. Rey Co has received legal advice that the most likely outcome of the court case from the employee is that they will lose the case and have to pay $10m. The second type of obligation is one called a constructive obligation. Rey Co has received legal advice that the most likely outcome of the court case from the employee is that they will lose the case and have to pay $10m. IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets. In this, Rey Co explains that they always replant trees to counter-balance the environmental damage created by their operations. The expected cost of minor repairs would be $10k (10% of $100k) and the expected costs of major repairs is $50k (5% of $1m). Clearly this is not good for the users of the financial statements, as they would have been manipulated and given a false impression of the performance of the business. IAS 37 full text Outlines the accounting for: (IAS 37 definition) Provisions ; is a liability with uncertain timing or amount. Therefore the liability is increased by 10% over the year, giving an increase of $910k which would be recorded in finance costs. Ongoing costs such as the costs of relocating staff should be excluded from the provision and should instead be expensed as they are incurred. In this case, the provision should be included within the original cost of the asset, as this is directly attributable to the construction of that asset. The accountant knows that if Rey Co  reports a profit of $13m, directors will not get any more of a bonus than if they reported $10m. The obligation needs to have arisen from a past event, rather than simply something which may or may not arise in the future. Restructuring costs associated with reorganising divisions provide two issues. The main rule to follow is that if the item is a one-off item, the best estimate will be the most likely outcome. (8 marks) (a) (i) Importance of information concerning an… Rey Co would have to provide for a potential legal case arising from an employee who was injured at work in 20X8 due to faulty equipment. It will not be uncommon to take the $12m, thinking that the worst-case scenario should be provided for. This is because there will not be a one-off payment, so Rey Co should calculate the estimate of all of the likely repairs. The first is to assess whether an obligation exists at the reporting date. ACCA CIMA CPD FIA (ACCA) AAT. C2. In this case, Rey Co would provide $10m, being the most likely outcome. This rule has two parts, first the type of obligation, and second, the requirement for it to come from a past event (something must have already have  happened to create the obligation). In addition to this, the expected timing of when the event should be resolved should also be included. As soon as an entity is aware that a contract is onerous, the full loss should be provided for as a liability in the statement of financial position. IAS 33 Bonus issue. During 20X8, Rey Co opened a new factory, leading to some environmental damage. Therefore the liability is increased by 10% over the year, giving an increase of $910k which would be recorded in finance costs. Group accounting – part 1. Comments on the proposed changes are re… If the employees have been informed, then an obligation exists and a provision must be made. These costsshould exclude any costs associated with any continuing activities. In this case, the provision should be included within the original cost of the asset, as this is directly attributable to the construction of that asset. For example, let’s take a fictional company, Rey Co. At the start of the year, Rey Co sets a profit target of $10m for the year ended 31 December 20X8. IAS 10 Events After The Reporting Period. Rey Co has a consistent history of honouring this policy. The chief accountant of Rey Co has reviewed the profit to date and realises they are likely to achieve profits of $13m. The legal team think there is an 80% chance of this. To address inconsistencies with other IFRSs. Rey Co has a published environmental policy. Other candidates may calculate an expected value based on the various probabilities. IFRS 3 Business Combinations . Rey Co estimate that the damage will cost $400,000 to restore. Therefore there is no present obligation to incur the costs associated with this. ... 37. In this situation, a contingent liability would be reported. A probable outflow simply means that it is more likely than not that the entity will have to pay money out. The obligation could be a legal or contractual one, arising from a court case or some kind of contractual arrangement. In reality a virtually certain inflow is unlikely. probable ( >50% ) outflow of resources. This is effectively an attempt to move $3m profit from the current year into the next period. By 31 December 20X9, when Rey Co is required to make the payment, the liability should be showing at $10m, not $9.09m. For example, in the case of an insurance claim where Rey Co can show they have cover. The second issue consideration is which costs should be included within the provision. This article will consider the aims of the standard, followed by the key specific criteria which must be met for a provision to be recognised. Please visit our global website instead. Therefore any provision should only include items such as redundancies and closure costs. Rey Co constructed an oil platform in the sea on 1 January 20X8 at a cost of $150m. As the double entry for a provision is to debit an expense and credit the liability, this would potentially reduce the profit down to $10m. If it appears that there is a possible outflow then no provision is recorded. Here, the provision would be measured at $60k. C2. IAS 37 requires an entity to record an obligation as a liability only if it is probable (i.e. IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Provisions from past papers in ACCA FR (F7). Additionally, there is no onerous contract in this scenario. This is because the event arose in 20X8 which could lead to an obligation. 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