Chapter 9
IAS 37: Provisions, Contingent Liabilities and Contingent
Assets
BPP
ANSWER 1
$ 3,863,000
The decommissioning provision should have been capitalised as part of the cost of the equipment
as its present value of $6,210,000 ($10m x 0.621) on 1 January 20X5.
This means that the depreciation for the year ended 31 December 20X5 would have been
$6,242,000 (($25m + $6.21m) x 1/5 years)
In addition to the depreciation of the equipment, the discount on the decommissiong provision
would need to be unwound and a finance cost of $621,000 ($6,210,000 x 10%) should be
recognised in the statement of profit or loss.
Therefore, the total charge to profit or loss relating to the equipment and decommissioning
provision required for the year ended 31 December 20X5 would be $6,863,000 ($6,242,000
depreciation + $621,000 finance cost).
ANSWER 2
The correct answers are:
Provisions should be made for both constructive and legal TRUE
obligations
Discounting any be used when estimating the amount of a TRUE
provision
A restructuring provision must include the estimated costs FALSE
of retraining or relocating continuing staff
A restructuring provision may only be made when a TRUE
company has a detailed plan for the restructuring and has
communicated to interested parties a firm intention to carry
it out
ANSWER 3
The correct answer is: Debt Provision $100,000, Debit Profit or loss $20,000; Credit Cash
$120,000
The provison is a liability and therefore a credit balance. On settlement, the provision must be
reversed with a debit. An expense of $100,000 was previously recognised in 20X4 when the
original provision was created, so therefore only the extra $20,000 paid needs to be recognised
as an expenses in profit or loss in 20X5. Cash is an asset and therefore a debit balance. It is
reduced by the amount paid with a credit entry.
ANSWER 4
$ 24,532,000
$’000
Restroation of seabed (10,000 x 250) 2,500
Dismantling of equipment (30m x 0.68) 20,400
Unwinding of discount (20,400 x 8%) 1,632
24,532
ANSWER 5
$0.6 million
$m
$2 million x 15% 0.3
$6 million x 5% 0.3
0.6
KAPLAN
ANSWER 6
Legal action against AP Legal action by AP
Provision Contingent asset
The legal action against AP has a probable outflow, so AP should make a provision. The legal
action taken by AP is a contingent asset. As it is probable, it should be disclosed in a note.
Assets should only be recognised when there is a virtually certain inflow.
ANSWER 7
C
A provision is only required when there is a present obligation arising as a result of a past event,
it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation, and a reliable estimate can be made of the amount. Only answer C meets all these
criteria. Answer A is incorrect because the obligation does not exist at the reporting date and also
cannot be reliably measured at present. Answer B is an example of an adjusting event after the
reporting date as it provides evidence of conditions existing at the reporting. Answer D is a
contingent liability. However, as its likelihood is remote no provision is necessary.
ANSWER 8
$3,500,000
Per IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the amount payable relates
to a past event (the sale of faulty products) and the likelihood of payout is probable (i.e. more
likely than not). Hence, the full amount of the payout should be provided for.
ANSWER 9
B
The costs associated with ongoing activities (relocation and retraining of employees) should not
be provided for.
ANSWER 10
B
Extraction provision at 30 September 20X4 is $2.5 million (250 × 10).
Dismantling provision at 1 October 20X3 is $20.4 million (30,000 × 0.68).
This will increase by an 8% finance cost by 30 September 20X4 = $22,032,000.
Total provision is $24,532,000.
ANSWER 11
D
Deferred tax relating to the revaluation of an asset must be provided for even if there is no
intention to sell the asset, in accordance with IAS 12 Income Taxes.
At 31 March 20X5 there is no present obligation to replace the oven lining, so no provision should
be accounted for.
A change in estimated useful life is a change in accounting estimate and should therefore be
accounted for prospectively rather than retrospectively.
ANSWER 12
There is a present obligation from a past event No
A reliable estimate can be made Yes
There is a probable outflow of economic benefits Yes
Whilst there is an estimate of $500,000 and it is probable that Faubourg will make the changes,
there is no present obligation at 31 December 20X4.
If Faubourg changes its mind and sells the building prior to June 20X5, no obligation would arise.
Future obligations are not accounted for as provisions.
ANSWER 13
A, D
Changes in provisions are regarded as changes in accounting estimates so should be accounted
for prospectively rather than retrospectively.
Provisions should be recorded at the best estimate, reflecting the amount most likely to be paid
out, rather than the highest possible liability.
ACCA STUDY HUB (QUIZ)
ANSWER 14
The correct answer is B.
The case against TY meets the definition of a provision and therefore should be recognised. The
claim against the sub-contractor is a contingent asset and should be disclosed in the financial
statements.
ANSWER 15
The correct answer is C.
$1,000,000 × discount rate 0.463 = $463,000 × 1.08 = $500,040; so a provision of $500,000
would meet the requirement of IAS 37.
Tutorial note: The $40 rounding is suitable as this is an accounting estimate.
ANSWER 16
The correct answer is A.
A The legal action does not relate to conditions existing at the year-end as the cause arose
subsequently.
ANSWER 17
The correct answer is B.
WORKING
Warranty provision
$ $
Repair/replacement cost 26,100 Provision b/f 24,800
Provision c/f 22,230 Expense (balance) 23,530
48,330 48,330
Provision c/f = (8,550 × 6% × $20) + (8,550 × 2% × $70) = $22,230
ANSWER 18
The correct answer is D.
Training costs relate to the ongoing business, not the operations that have been discontinued and
so cannot be included in the provision.
ACCA STUDY HUB (PRACTICE)
ANSWER 19
A company expecting future operating losses should make INCORRECT
provision for those losses as soon as it becomes probable that
they will be incurred
Details of all adjusting events after the reporting period must be INCORRECT
disclosed by note in a company’s financial statements
A contingent asset must be recognised as an asset in the INCORRECT
statement of financial position if it is probable that it will arise
Contingent liabilities must be treated as actual liabilities and CORRECT
provided for when it is probable that they will arise, if they can be
measured with reliability
Tutorial note: No provision can be made for future operating losses. Non-adjusting events are
disclosed. Contingents assets are not recognised until virtually certain.
ANSWER 20
The correct answers are A and D.
Tutorial note: A contingent liability with a probable outflow of economic benefits should be
recognised as a provision; mere disclosure is insufficient. A contingent liability that is less than
probable should be disclosed.
ANSWER 21
Fine Damages
Provision Disclosure only
Tutorial note: The fine is a present obligation; a liability that must be provided for. The damages
are a contingent asset, which should be disclosed.
ANSWER 22
The correct answers are A and C.
Tutorial note: A provision should be made for the loss on the non-cancellable contract (i.e. it is
onerous). Provision must be made for deferred tax even if there is no intention to sell.
ANSWER 23
The correct answer is B.
WORKING
$000 $000
Extraction provision at 30 September 20X4
(250 × 10) 2,500
Dismantling provision:
At 1 October 20X3 (30,000 × 0.68) 20,400
“Unwinding of the discount” (20,400 × 8%) 1,632 22,032
Total provision 24,532
ANSWER 24
The correct answer is C.
WORKING
$
Provision at 1 July 20X8 ($3m × 0.713) 2,139,000
Interest to 31 Dec 20X8 (7% × $2.139m × 6/12) 74,865
Provision at 31 Dec 20X8 2,213,865
ANSWER 25
The correct answer is $6863.
Tutorial note: The total expense to profit or loss relating to the equipment and decommissioning
provision is the sum of depreciation expense (IAS 16) and the finance cost in respect of the
“unwinding of the discount” (IAS 37).
WORKING
$000
Purchase cost of equipment 25,000
Present value of decommissioning cost ($10m × 0.621) 6,210
Total cost (IAS 16) 32,210
Depreciation for the year ($31.21m × 1/5 years) 6,242
Finance cost (10% × $6,210) 621
6,863
