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Chapter 17 Provisions and Post Balance Sheet Events
Chapter 17 Provisions and Post Balance Sheet Events
Chapter 17
Provisions, Contingencies and
Events after the Reporting Period
Reference: IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
IAS 10 – Events After the Reporting Period
IFRIC 1 – Changes in Decommissioning, Restoration and Similar Liabilities
Contents: Page
1. Introduction 542
540 Chapter 17
Gripping IFRS Provisions, Contingencies & Events after the Reporting Period
8. Summary 565
541 Chapter 17
Gripping IFRS Provisions, Contingencies & Events after the Reporting Period
1. Introduction
This chapter covers two standards: IAS 37 and IAS 10. The standard, IAS 37, covers certain
types of liabilities and assets whereas IAS 10 deals with events that occur after the reporting
period but before the financial statements are authorised for issue.
In IAS 37, the focus is on liabilities and assets that are subject to some type of uncertainty.
Both liabilities and assets are defined in the Framework and it would be beneficial for you to
refresh your memory of these two definitions before continuing. The discussion of the
standard on provisions and contingencies (IAS 37) will be covered in three separate stages:
first we will investigate the recognition of liabilities; then the recognition of assets and then
the disclosure of liabilities and assets. It is important that you get to know the definitions used
in IAS 37.
Provision:
• A liability of uncertain timing or amount.
Liability (framework)
• a present obligation (legal or constructive);
• of the entity;
• as a result of a past event;
• the settlement of which is expected to result in an outflow of future economic benefits.
Obligating event:
• An event that creates a
• legal or constructive obligation that results in an entity having
• no realistic alternative to settling that obligation.
Legal obligation:
An obligation that derives from
• a contract (through its explicit or implicit terms);
• legislation; or
• other operation of law.
Constructive obligation:
An obligation that derives from:
• an entity’s actions where
• by an established pattern of past practice, published policies or a sufficiently specific
current statement,
• the entity has indicated to other parties that it will accept certain responsibilities, AND
• as a result, the entity has created a valid expectation on the part of those other parties that
it will discharge those responsibilities.
Contingent liability:
There are two types of contingent liabilities defined (slightly modified wording).
• A possible obligation from past events;
• whose existence will be confirmed only by the:
• occurrence or non-occurrence of
• one or more uncertain future events
• not wholly within the control of the entity (e.g. a possible negative court ruling)
OR
• A present obligation from past events
• that is not recognised because (the recognition criteria are not met):
• it is not probable that an outflow of economic benefits will be needed to settle the
obligation; or
• the amount of the obligation cannot be measured with sufficient reliability.
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Contingent asset:
• A possible asset that arises from past events and
• whose existence will be confirmed only by the:
• occurrence or non-occurrence of
• one or more uncertain future events
• not wholly within the control of the entity (e.g. a possible positive court ruling).
Onerous contract: (slightly modified wording)
• A contract where:
• the unavoidable costs of meeting the terms of the contract
• exceed the benefits to be derived from the contract.
Restructuring:
• a programme that is planned and controlled by management and
• materially changes either:
• the scope of the business undertaken by the entity; or
• the manner in which the business is conducted.
3. Liabilities, provisions and contingent liabilities (IAS 37.14 – .30 & .36 – .52)
A provision is simply a liability where either (or both) the amount or the timing is uncertain.
Provisions and liabilities are both recognised in the statement of financial position but are
disclosed separately from one another.
It needs to be remembered that before an element may be recognised (provided for), both the
definition of the element and the recognition criteria need to be met. Whereas contingent
liabilities are never recognised, ‘pure’ liabilities and provisions are recognised if they:
• meet the definition of a liability; and
• meet the recognition criteria:
− a reliable estimate of the liability must be possible; and
− the outflow of future economic benefits must be probable.
The most fundamental part of the definition is that there must be an obligation. Deciding
whether or not there actually is an obligation is frequently difficult, and is an exercise that
requires much professional judgement. There is a thin line separating ‘pure’ liabilities,
provisions and contingent liabilities.
In very rare instances, it may be difficult to determine if there is a present obligation or even
if there is a past event. In these instances, the entity must decide if it is:
• more likely that a present obligation did exist at year-end, in which case a provision is
recognised; or
• more likely that a present obligation did not exist at year-end, in which case a
contingent liability is disclosed (unless the possible outflow of future economic
benefits is remote).
In making this decision, the entity uses its professional judgement, other expert opinions (e.g.
legal opinion) and events after the reporting period.
An example of such a situation is when a court case is in progress at year-end, where there is
no indication as to whether an entity has an obligation or even whether the deed that the entity
is being accused of actually occurred (i.e. whether there is a past event at all).
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For an event to lead to a present obligation there must be ‘an obligating event’. An obligating
event is one that leaves the entity with no realistic alternative but to settle the liability. There
are two types of obligations possible:
• a legal obligation, and
• a constructive obligation.
This means that a decision made at a board meeting would not lead to a present obligation
because this event does not involve a third party and is not separate from the entity’s future
actions (its future actions could be changed if the board later decides to change its mind).
Required:
Explain whether or not any of the above result in present obligations as at 31 December 20X3.
Required:
Explain whether or not Damij Ltd should recognise a liability or a provision in its statement of
financial position as at 31 December 20X3.
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In deciding whether an outflow of future economic benefits is probable, one must be sure that
the outflow is more likely to occur than not to occur, in which case a provision should be
recognised. If it is more likely that the outflow will not occur, then a contingent liability
should be disclosed (unless the possible outflow is remote).
It should be remembered that uncertainty and estimates are a normal part of the recognition
and measurement process.
Although a provision is a liability of uncertain amount, this does not mean that the liability
cannot be reliably measured. If the estimated amount of an obligation involves a normal
degree of uncertainty, and it is possible to make a reliable estimate thereof, it is recognised as
a ‘pure’ liability. For example, the telephone bill payable at year-end must be estimated if the
actual invoice has not yet been received. This level of uncertainty is not material enough to
classify the obligation as a provision and therefore it is recognised as a ‘pure liability’.
If the estimated amount of an obligation involves a larger degree of uncertainty than normal,
but yet a reliable estimate is still possible, the liability is still recognised but is termed a
provision. Provisions should be disclosed separately from ‘pure liabilities’. A typical
example of a provision is the estimated amount of damages payable pursuant to a court case
where the court case has already ruled against the entity but has yet to establish an amount.
If an amount is so uncertain that the estimate is not reliable, then the you have a contingent
liability. You could not recognise it as a liability since one of the recognition criteria – being
able to reliably measure an amount – is not met. A typical example of a contingent liability
would be where the entity is being sued but it is either not yet possible to estimate whether the
courts will probably rule against the entity (i.e. the outflow of future economic benefits is not
yet probable) or it is not yet possible to estimate the amount that the courts will force the
entity to pay (i.e. a reliable estimate is not yet possible).
Contingent liabilities are never recognised as liabilities, meaning that the contingent liability
will never be journalised. Contingent liabilities are, however, disclosed in the notes to the
financial statements where it is considered relevant to the user. There are two different types
of contingent liabilities:
• one that is a liability that may not be recognised because one or both of the recognition
criteria are not met (let’s call this type 1); and
• the other that is almost a liability, but falls short of the definition in that there is only a
possible obligation, (as opposed to a present obligation) (let’s call this type 2). In this
latter type, the existence of the obligation will only be confirmed by the occurrence of
some future event/s that is not wholly within the control of the entity.
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Therefore, only the first type of contingent liability is technically a liability because it meets
the definition, but in the case of both types, no liability is recognised although disclosure
thereof may be required.
3.3 Measurement: liabilities, provisions and contingent liabilities (IAS 37.36 - .52)
As with the recognition of all types of liabilities, there is judgement involved in the
measurement thereof. The same principles are used whether measuring liabilities, provisions
or contingent liabilities. Although a contingent liability is not recognised, it should be
measured and disclosed where it is material and a reliable estimate is possible. Provisions
should be measured at the ‘best estimate of the expenditure required to settle the present
obligation’ at the end of the reporting period (i.e. the amount that the entity would ‘rationally
pay’ to settle the obligation or transfer it to a third party at the end of the reporting period).
The best estimate of the amount of an obligation is the amount that an entity would rationally
pay to settle the liability. It is frequently difficult to determine the amount of the obligation or
the timing of the settlement of the obligation. When making these estimates, management
should consider:
• previous experience;
• similar transactions;
• possibly expert advice; and
• events after the reporting period.
Previous experience may indicate a range of possible outcomes, for which it may be possible
to estimate a probability. This is referred to as the calculation of expected values using the
theory of probabilities. The application of this theory is best explained by way of example.
A company offers goods for sale with a 6-month warranty, where goods sold that are found to
be faulty within 6 months after purchase may be returned for a full refund. Not all goods will
be faulty and similarly, not all customers bother to return faulty goods. The company’s past
experience suggests that the following are the possible outcomes and the probability thereof:
Required:
Calculate the expected cost of the provision and journalise it.
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Imagine being asked whether you would prefer to receive C100 today or C100 in 10 year’s
time. For many reasons, (including the fact that you could utilise the C100 immediately), you
would choose to receive it immediately. This is because the value of C100 received in the
future is less to you than the value of C100 received today. In other words, today’s value (the
present value) of a future cash flow is less than the actual (absolute/ future) amount of the
cash flow. This is essentially the present value effect or the effect of the time value of money.
If the difference between the actual (future) amount of the cash flow and the present value
thereof is material, then the liability should be recorded at its present value. The present value
is calculated using a pre-tax discount rate based on the current market assessment of the time
value of money and the risks specific to the liability.
As the period between the present and the date of the future cash flow gets shorter, so the
difference between the present value and the actual (future) value of the cash flow gets
smaller. Therefore, each year the present value of the future outflow must be recalculated
with the result that the provision (the present value) will gradually be increased until the
actual settlement date is reached, when the provision will finally equal the actual liability.
When the settlement is due, the actual amount due and the present value thereof must
logically be equal. The increase in the liability each year will be debited to finance charges
(notional).
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Solution to example 4: discounting liabilities to present values and the related journals
Debit Credit
Year 1 – beginning
Expense/ Asset 60 000
Liability 60 000
Initial recognition of the obligation: beginning of year 1
Year 1 – end
Finance charges (E) 10 000
Liability 10 000
Increase in liability as a result of time value of money:
70 000 – 60 000
Year 2 – end
Finance charges (E) 20 000
Liability 20 000
Increase in liability as a result of time value of money:
90 000 – 70 000
Year 3 – end
Finance charges (E) 10 000
Liability 10 000
Increase in liability as a result of time value of money:
100 000 – 90 000
Liability 100 000
Bank 100 000
Payment of liability at the end of year 3
Example 5: calculating the present (discounted) values and the related journals
A factory plant is bought on 1 January 20X1 for C450 000 cash including costs of installation.
The entity is obliged to decommission the plant after a period of 3 years.
Future decommissioning costs are expected to be C399 300.
The company uses a discount rate of 10%.
Required:
Draw up a present value table showing the present value of the future costs on January 20X1
and at the end of each year together with the annual movements. First calculate the present
value/ discount factors (or use a financial calculator).
Journalise all related entries.
Solution to example 5: calculating the present (discounted) values and the journals
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Number of years until the cash settlement Calculation of discount factor Discount factor (rounded): 10%
0 years (i.e. it’s due) Actual = 1 1
1 year 1/(1+10%) 0.909
2 years 0.909/(1+10%) 0.826
3 years 0.826/(1+10%) 0.751
Notice that as it gets closer to the date on which the 399 300 is to be paid, the discount factor increases. The
gradual increase in the discount factor over the passage of time is referred to as the ‘unwinding of discount’. This
causes the liability to gradually increase from its original present value of 300 000 to 399 300 on
31 December 20X3. The increase in the liability results in the recognition of finance charges each year. Notice that
the total finance charges of 99 300 when added to the present value of the liability of 300 000 (on date of initial
recognition) is 399 300, the future value (actual amount paid).
Debit Credit
1 January 20X1
Plant: cost (A) 450 000
Bank 450 000
Purchase of plant for cash
Plant (decommissioning) (A) 300 000
Decommissioning liability 300 000
Initial recognition of the decommissioning obligation
31 December 20X1
Finance charges (E) 30 000
Decommissioning liability 30 000
Increase in liability as a result of unwinding of the discount
31 December 20X2
Finance charges (E) 33 000
Decommissioning liability 33 000
Increase in liability as a result of unwinding of the discount
Depreciation (E) 250 000
Plant: accumulated depreciation 250 000
Depreciation of plant (450 000 + 300 000) / 3 years
31 December 20X3
Finance charges (E) 36 300
Decommissioning liability 36 300
Increase in liability as a result of unwinding of the discount
Depreciation (E) 250 000
Accumulated depreciation 250 000
Depreciation of plant (450 000 + 300 000) / 3 years
Decommissioning liability 399 300
Bank 399 300
Payment in respect of decommissioning
Please notice that a total of 849 300 is expensed over the 3 years: depreciation of 750 000 (250 000 for 3 years)
and the finance charges of 99 300. This is the total cost of using and decommissioning the asset: 450 000 (cost of
asset excluding cost of decommissioning) and 399 300 (cost of decommissioning). Also notice how the cost
(present value) of the decommissioning of the plant is debited to the plant’s cost account (IAS 16.16).
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When calculating the amount of the liability or provision, expected future events should be
taken into account when there is ‘sufficient objective evidence’ available suggesting that the
future event will occur. An example would be possible new legislation that is virtually certain
to be enacted that may lead to a provision for environmental restoration (clean-up).
A company owns a number of nuclear plants. The company is presently obliged to dismantle
one of these nuclear plants in 3 years time.
The last nuclear plant dismantled by the company cost C1 000 000 to dismantle, but the
company expects to dismantle this nuclear plant, if using the same technology, at a slightly
reduced cost of C800 000 due to the increased experience. There is, however, a chance that
completely new technology may be available at the time of dismantling, which could lead to a
further C200 000 cost saving.
Required:
Discuss the measurement of the provision.
A provision should reflect expected future events where there is sufficient objective evidence that these
will occur. Since the company has had experience in dismantling plants, it is argued that the expected
cost savings through this experience is reasonably expected to occur. The cost savings expected as a
result of the possible introduction of completely new technology, being outside of the control of the
company, should not be taken into account, unless of course the company has sufficient objective
evidence that this technology will be available. The provision should be measured at C800 000.
When an obligation involves the sale of an entity’s assets (e.g. during the restructuring of a
business) and the sale thereof is expected to result in a gain, this gain should not be included
in the calculation of the provision since this would reduce the provision, which would not be
considered prudent.
New legislation means that Undoo Ltd must dismantle its nuclear plant in a year’s time. The
dismantling is estimated to cost C300 000 but Undoo Ltd also expects to earn income from
the sale of scrap metal of C100 000. The effects of discounting are expected to be immaterial.
Required:
Process the required journal entry to raise the provision
Debit Credit
Nuclear plant (A) 300 000
Provision for dismantling costs 300 000
Expected costs of dismantling (i.e. the C100 000 expected income is
not offset against the expected costs)
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Reimbursements occur when, for example, a retailer offers a guarantee to its customer, but
where the manufacturer in turn offers the retailer a counter-guarantee.
In the instance where the retailer does not offer a guarantee for faulty goods, but the
manufacturer does, faulty goods would be returned to the retailer who would then send the
goods back to the manufacturer who would then replace the goods. In this case, the retailer
should not make a provision for any guarantee since no guarantee was offered by the retailer:
the retailer has no obligation, but is merely acting as a conduit between the customer and
manufacturer.
However, a retailer may offer its customers a guarantee that is either partially or fully covered
by the manufacturer. In this case, since the retailer offers the guarantee, the retailer should
make a provision for the total expected costs of fulfilling the guarantee despite the fact that
the retailer may then return the goods to the manufacturer for a full or partial refund
(reimbursement of costs). This reimbursement should be recognised as a separate asset and
should not be set off against the provision for the total expected costs of fulfilling the
guarantee since the actual sequence of events would then be obscured to the user of the
financial statements. Although the resultant asset and liability should not be set off against
each other, the income and expense may be.
Example 8: reimbursements
Required:
State whether the retailer must raise a provision for the cost of meeting future guarantee
obligations:
A. The retailer company provides the guarantee.
B. The manufacturer provides the guarantee. The retailer is not liable in any way.
C. The manufacturer provides the guarantee but the retailer company provides a guarantee
irrespective of whether the manufacturer honours his guarantee.
D. The manufacturer and retailer company provide a joint guarantee, whereby they share the
costs of providing the guarantee: they jointly and severally accept responsibility for the
guarantee.
E. The manufacturer and retailer company provide a joint guarantee, whereby they share the
costs of fulfilling the guarantee: the retailer is not liable for amounts that the manufacturer
may fail to pay.
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Example 9: reimbursements
A retailer company estimates that it will cost C100 000 to fulfil its obligation in respect of the
guarantees offered to its customers. The manufacturer, however, offers a guarantee to the
retailer company.
Required:
Show all related journal entries assuming that
A: the entire C100 000 is virtually certain of being received from the manufacturer.
B: an amount of C120 000 is virtually certain of being received from the manufacturer.
Debit Credit
Cost of fulfilling guarantees (E) 100 000
Provision for guarantees (L) 100 000
Provision for the cost of fulfilling guarantees
Guarantee reimbursement (A) 100 000
Guarantee reimbursement income (I) 100 000
Provision for guarantee reimbursements
Comment: The asset and liability should be separately disclosed and should not be set-off against each
other (therefore both asset and liability will appear in the statement of financial position) whereas the
income and expense may be set-off against each other and, in this case, would cancel each other out
(will not appear in the statement of comprehensive income at all).
The same information as that provided in example 5 applies to the purchase of a factory plant:
During 20X2, it was established that, due to unforeseen prices increases, the expected future
cost of decommissioning will be C665 500.
Required:
Draw up a present value table showing the revised present value of the future costs on
January 20X1 and the end of each subsequent year together with the annual movement. First
calculate the present value/ discount factors (or use a financial calculator).
Show all related entries in t-account format.
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Date Discount factor Calculation of Finance Liability Calculation of finance charges: can
(rounded): liability balance charges balance be calculated either way
10% (present value)
Liability Movement in
balance x 10% liability balance
1 Jan X1 W1 W1 300 000
31 Dec X1 W1 30 000 330 000 300 000 x 10% 330 000 – 300 000
550 000 – 330 000 220 000
31 Dec X1 0.826 665 500 x 0.826446 550 000
31 Dec X2 0.909 665 500 x 0.909091 55 000 605 000 550 000 x 10% 605 000 – 550 000
31 Dec X3 1 665 500 x 1 60 500 665 500 605 000 x 10% 665 500 – 605 000
Total 145 500 30 000 + 55 000 + 60 500
It can be seen from the new present value table (W2) above that:
• At 1 January 20X2: the liability balance should be 550 000 and not 330 000 – an increase of
220 000 is therefore required to increase this liability (and its related asset: plant);
• In 20X2: the depreciation will be based on the revised carrying amount of the asset: (cost of asset:
450 000 + cost of future decommissioning: 300 000 + 220 000 adjustment – depreciation in 20X1:
250 000) / 2 years remaining x 1 year = 360 000;
• In 20X2: finance costs will be based on the revised table (W2): 55 000 (not 33 000 per W1).
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The following entries must therefore be processed in the ledger (see these processed on the next page):
(4) Adjustment to the asset and liability account: 550 000 – 330 000 = 220 000
(5) depreciation: 360 000 (in 20X2 and 20X3)
(6) finance costs: 55 000 in 20X2 and 60 500 in 20X3.
A provision is made for future costs. When these costs are eventually paid for, the provision
is reduced. Care must be taken to reduce the provision by only those costs, now paid for, that
were originally provided for.
Costs that have been contractually committed to but not yet incurred in the current year
should not be recognised as a liability since these are considered to be future costs. One
exception to this rule is an onerous contract.
An onerous contract is one where the costs to fulfil the terms of the contract are greater than
the benefits that will be derived from it (i.e. will make a loss). In this case, the unavoidable
costs should be provided for. The unavoidable costs (per IAS 37) are the lower of:
• the cost of fulfilling the contract; and
• the compensation or penalties that would be incurred if the contract were to be cancelled.
Required:
Process the required journal entry.
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Debit Credit
Contract cost 30 000
Provision for onerous contract (L) 30 000
Minimum cost related to an onerous contract: the cost to exit is
30 000 whereas the expected loss is 60 000 (140 000 – 80 000)
Restructuring occurs when, for example, a line of business is sold (e.g. a shoe manufacturer
sells a factory producing takkies) or there is a change in the management structure. In both
cases, there will be a variety of costs involved: for example, retrenchment packages will
probably need to be paid out and in the case of the sale of the factory, there may be costs
incurred in the removal of certain machinery.
The same definition and recognition criteria must be met before making a provision for the
costs of restructuring although IAS 37 provides further criteria to assist in determining
whether the definition and recognition criteria have been met. These extra criteria are:
• there must be a detailed formal plan that identifies at least the following:
− the business or part of the business affected;
− the principal locations affected;
− the location, function and approximate number of employees who will be
compensated for terminating their services;
− the expenditure that will be undertaken;
− when the plan will be implemented; AND
• the entity must have raised valid expectations in those affected before the end of the
reporting period that it will carry out restructuring, by either having:
− started to implement the plan; or
− announced its main features to those affected by it.
Costs of restructuring a business entity should be provided for on condition that the costs
provided for are only those costs that are directly associated with the restructuring, being:
• those that are necessary; AND
• not associated with the ongoing activities of the entity (i.e. future operating costs are not
part of the provision, for example: retraining and relocation costs for continuing staff,
investment in new systems, marketing etcetera).
Where the restructuring involves a sale of an operation, no obligation arises until there is a
binding sale agreement.
A few days before year-end, Dropout Ltd announced its intention to close its shoe factory
within 6 months of year-end. There is a detailed formal plan that lists, amongst other things,
the expected costs of closure:
• retrenchment packages: C1 000 000
• retraining the staff members who will be relocated to other factories: C500 000
• loss on sale of factory assets: C100 000
Required:
Process the required journal entry.
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Note: The cost of retraining staff is a future operating cost and must therefore not be provided for. The
loss on sale of factory assets simply indicates a possible need to impair the relevant assets at year-end.
4.1 Recognition
For an asset to be recognised, both the definition and the recognition criteria need to be met.
Contingent assets, which are only possible assets depending on future events, will, however,
never be recognised since the definition and recognition criteria will not be met.
4.2 Measurement
Although contingent assets are not recognised, the asset/s may need to be disclosed, in which
case its value will still need to be measured. The measurement principles for a contingent
asset are the same as that for a contingent liability. For example, if the inflow is expected far
into the future, the present value thereof should be calculated and if this present value is
materially different from the absolute value of the inflow, then the present value should be
used instead.
5.1 Provisions
Provisions should be disclosed as a separate line item in the statement of financial position.
For each class of provision, disclose the following in the notes to the financial statements:
• a brief description of the nature of the obligation;
• the expected timing of the outflows;
• the uncertainties relating to either or both the amount and timing of the outflows;
• major assumptions made concerning future events (e.g. future interest rates; the
assumption that a future law will be enacted with the result that a related provision was
raised; future changes in prices and other costs);
• the expected amount of any reimbursements including the amount of the reimbursement
asset recognised (if recognised at all);
• a reconciliation between the opening carrying amount and the closing carrying amount of
the provision (for the current period only) indicating each movement separately:
− additional provisions made plus increases made to existing provisions;
− increases in a provision based on increasing present values caused by the normal
passage of time and from any changes to the estimated discount rate;
− amounts used during the year (debited against the provision); and
− unused amounts reversed during the year.
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The disclosure requirements for a change in accounting estimate (per IAS 8) are as follows:
• the nature and amount of the change in estimate must be disclosed, where the amounts to
be disclosed are as follows:
- the effect on the current period; and
- the effect on future periods.
The same information as that provided in example 10 applies to the purchase of a factory
plant:
Cash purchase price (1 January 20X1) : 450 000
Future decommissioning (the outflow expected on 31 December 20X3, : 399 300
as assessed on 1 January 20X1)
Discount rate : 10%
Depreciation straight-line to nil residual values : 3 years
During 20X2, it was established that, due to unforeseen prices increases, the expected future
cost of decommissioning will be C665 500.
Required:
Disclose the decommissioning asset and liability in the statement of financial position and
related notes for the year ended 31 December 20X2.
Company name
Statement of financial position (extracts)
As at 31 December 20X2
Note 20X2 20X1
ASSETS C C
Non-current assets
Property, plant and equipment 7 360 000 500 000
LIABILITIES AND EQUITY
Non-current liabilities
Provisions 6 605 000 330 000
Company name
Notes to the financial statements (extracts)
For the year ended 31 December 20X2
20X2 20X1
6. Provision for decommissioning C C
Opening carrying amount 330 000 0
Provision for decommissioning raised 0 300 000
Increase in provision – increased future cost 220 000
Increase in present value – unwinding of 55 000 30 000
discount: finance charges (per note 8)
Closing carrying amount 605 000 330 000
Decommissioning of the plant is expected to occur on 31 December 20X3 and is expected to result
in cash outflows of 665 500 (20X1 estimate: 399 300). The amount of the outflows is uncertain
due to changing prices. The timing of the outflow is uncertain due to the changing asset usage,
which may result in a longer or shorter useful life. Major assumptions include that the interest
rates will remain at 10% and that the asset has a useful life of 3 years.
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Company name
Notes to the financial statements continued … (extracts)
For the year ended 31 December 20X2
20X2 20X1
7. Property, plant and equipment C C
Factory plant:
Net carrying amount: 1 January 500 000 0
Gross carrying amount: 1 January 750 000 0
Accumulated depreciation: 1 January (250 000) 0
Acquisition (450 000 + 300 000) 0 750 000
Depreciation (see profit before tax note) (360 000) (250 000)
Increase in present value of future decommissioning 220 000 0
costs
Net carrying amount: 31 December 360 000 500 000
Gross carrying amount: 31 December 970 000 750 000
Accumulated depreciation: 31 December (610 000) (250 000)
9. Change in estimate
The expected cash outflow on 31 December 20X3 in respect of the decommissioning of plant was
changed. The effect of the change is as follows: increase/(decrease)
• Current year profits (before tax) C1&C2 (132 000)
(W1: 22 000 + W2: 110 000)
• Future profits (before tax) C1&C2 (134 200)
(W1: 24 200 + W2: 110 000)
Workings:
For detailed calculations, see the present value table in example 10 based on the old estimate
(supporting the ‘was’ column) and the present value table in example 10 based on the new estimate
(supporting the ‘is’ column).
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Where the contingent asset is to be disclosed, the following information should be provided:
• a brief description of the nature of the contingent asset; and
• an estimate of its financial effect.
There are two instances where disclosure of provisions, contingent liabilities and contingent
assets are not required:
• where disclosure thereof is not practicable, in which case this fact should be stated; and
• where the information required would be seriously prejudicial to the entity in a dispute
with a third party. If this is the case, then the general nature of the dispute together with
the fact that disclosure has not been made and the reason for non-disclosure should be
disclosed.
6.1 Overview
Although one might assume that events that occur after the current year-end should not be
taken into account in the current year’s financial statements, this is not always the case!
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The period between the end of the reporting period (the year-end) and the date on which the
financial statements are authorised for issue is often referred to as the post-reporting date
period.
Assume that an entity has a December year-end and that the financial statements for 20X1
were completed and ready for authorisation on 25 March 20X2. In this case, the period
1 January 20X2 to 25 March 20X2, is the ‘post-reporting date period’, and events taking place
during this period need to be carefully analysed in terms of this standard into one of two
categories: adjusting events and non-adjusting events.
The importance here is that the condition must already have been in existence at year-end.
Frequently, estimates are made at year-end (e.g. impairment losses, doubtful debts, legal and
settlement costs) where these estimates are made based on the circumstances prevailing at the
time that the estimate is made. If the new information is discovered during the post-reporting
date period that gives a better indication of the true circumstances at year-end, then estimates
may need to be changed accordingly.
Required:
Explain whether the above event should be adjusted for or not in the financial statements of
Newyear Limited as at 31 December 20X2. If the event is adjusting provide the journal
entries.
The event that caused the debtor to go insolvent was the fire, which happened before year-end. This is
therefore an adjusting event. The adjustment would be as follows:
Please note that the event need not be unfavourable to be an adjusting event, for example, a
debtor that was put into provisional liquidation at year-end may reverse the liquidation
procedure during the post-reporting date period, in which case it may be considered
appropriate to exclude the value of his account from the estimated doubtful debts and thus
increase the value of the debtors at year-end.
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6.3 Non-adjusting events after the reporting period (IAS 10.10 – 11)
Non-adjusting events after the reporting period are defined in IAS 10 as:
• those that are indicative of conditions that arose after the reporting period.
Non-adjusting events are not taken into account (adjusted for) when preparing the current
year’s financial statements, but may need to be disclosed depending on their materiality.
If the event gives more information about a condition that only developed after year-end, then
this event has obviously no connection with the financial statements that are being finalised.
If, however, the event is so material that non-disclosure thereof would affect the users’
understanding of the financial statements, then, although the event is a non-adjusting one,
disclosure of the event may be appropriate.
A debtor that owed Newyear Limited C100 000 31 December 20X2 (year-end) had their
factory destroyed in a fire.
• As a result, this debtor filed for insolvency and will probably pay 30% of the balance
owing. A letter from the debtor’s lawyers to this effect was received by Newyear Limited
in February 20X3.
• The financial statements are not yet authorised for issue.
• The fire occurred during January 20X3.
Required:
Explain whether the above event should be adjusted for or not in the financial statements of
Newyear Limited as at 31 December 20X2. If the event is adjusting provide the journal
entries.
The event that caused the debtor to go insolvent was the fire, which happened after year-end. This is
therefore a non-adjusting event. Disclosure of this may be necessary if the amount is considered to be
material.
Dividends relating to the period under review that are declared during the post-reporting date
period must not be recognised (adjusted for) since they do not meet the criteria of a present
obligation. They do not reflect a present obligation because the obligating event is the
declaration and where this declaration does not occur before year end, it is not a past event.
These must be disclosed in the notes to the financial statements instead (in accordance with
IAS 1: Presentation of financial statements).
The standard dealing with the presentation of financial statements, (IAS 1), requires that
management make an annual formal assessment of the ability of the entity to continue as a
going concern. If it is considered that the going concern assumption is no longer appropriate,
then the financial statements will need to be completely revised, whether or not the condition
was in existence at year-end.
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Finito Ltd is currently in the process of finalising their financial statements for the year ended
31 December 20X2. The following events occurred since 1 January 20X3 and
28 February 20X3 (today’s date):
A. A debtor that owed Finito Ltd C100 000 at year-end was in financial difficulties at year
end and, as a result, Finito Ltd processed a doubtful debt adjustment of C30 000 against
this account. In January 20X3, the debtor’s lawyers announced that it would be paying
40% of all debts.
B. A debtor that owed Finito Ltd C150 000 at year-end had their factory destroyed in a labour
strike in December 20X2. As a result, this debtor has filed for insolvency and will
probably pay 60% of the balance owing. Finito Ltd was unaware of this debtor’s financial
difficulties at 31 December 20X2.
C. Inventory carried at C100 000 at year-end was sold for C80 000 in January 20X3. It had
been damaged in a flood during June 20X2.
D. Current tax expense of C30 000 had been incorrectly debited to revenue in 20X2.
E. A court case was in progress at 31 December 20X2 in which Finito Ltd was the defendant.
No provision was raised at year-end because Finito Ltd disputed the claims made. The
court has since ruled against Finito Ltd but has not yet indicated the amount to be paid to
the claimant in damages. Finito Ltd’s lawyers have estimated that an amount of C200 000
will be payable.
F. Finito Ltd had decided in a directors meeting held on 28 December 20X2 to close down a
branch in the Canary Islands. This decision was announced to the affected suppliers and
employees via a newspaper article published on 15 January 20X3.
G. A customer lodged a claim against Finito Ltd for food poisoning experienced in February
20X3. After investigation, Finito Ltd discovered that all cans of blueberries produced in
December 20X2 are poisoned. The claim is for C100 000. The carrying amount of canned
blueberries in stock at 31 December 20X2 is C80 000. Legal opinion is that Finito Ltd
may be sued for anything up to C1 000 000 in damages from other customers although a
reliable estimate is not possible.
H. Finito Ltd declared a dividend on 20 February 20X3 of C30 000.
Required:
None of the above events has yet been considered. Explain whether the above events should
be adjusted for or not when finalising the financial statements for the year ended
31 December 20X2. If the event is an adjusting event, provide the relevant journal entries.
A. An adjusting event: the event that caused the debtor to go insolvent occurred before year-end: the
lawyers announcement simply provided information regarding conditions in existence at year-end.
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C. An adjusting event: the event that caused the inventory to be sold at a loss occurred before year-
end (the event simply gives more information about the net realisable value at year-end).
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8. Summary
Liabilities
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Gripping IFRS Provisions, Contingencies & Events after the Reporting Period
The following flowchart is a useful summary of when to recognise and when to disclose a
particular type of liability.
Liability
Yes Yes
Probable Possible
No No Remote: Ignore
outflow? outflow?
Yes Yes
Disclose as a
Reliable
No contingent
estimate?
liability
Yes but
high degree of
Yes uncertainty
Please note that the standard refers to an outcome being probable when it is ‘more likely
than not’ to occur. This definition applies only to this standard and would not necessarily
be appropriate when dealing with other standards. The term ‘possible’ referred to in the
flowchart above refers to ‘as likely to occur as not to occur’ (where there is an equal
possibility that the outcome ‘happens’ and ‘doesn’t happen’) as well as ‘less likely to occur
than not to occur’.
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Assets
• A resource
• Controlled by the entity
• As a result of past events
• From which future economic benefits
are expected to flow into the entity
where this flow of where this flow of where this flow of where this flow
economic benefits economic benefits economic benefits of economic
is considered is considered is considered to be benefits is
certain: virtually certain: probable: considered to be
possible or
- recognise - disclose remote:
- recognise
- ignore
The following flowchart is a useful summary of when to recognise and when to disclose a
particular type of asset.
Asset
inflow
certain or Inflow Inflow possible /
No No
virtually probable? remote
certain?
Reliable Disclose as a
No Ignore
estimate? contingent asset?
Yes
Recognise
(Pure asset, not
contingent)
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Events that give more Events that give more Where the going concern
information about information about ability of the entity
conditions that were conditions that only becomes no longer
already in existence at arose after year-end feasible, the financial
year-end statements need to be
completely revised,
whether or not this
condition was in existence
at year-end
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