Chapter 3 Accounting for Provisions, Contingencies and Events after the Reporting Period

LEARNING OBJECTIVES 1. 2. 3. %. (. Define and identify provisions ( ), contingent liabilities ( ) and contingent assets () (IAS 37). E plain t!e re"#ire$ents of IAS 37 in relation to t!e acco#nting treat$ent of contingencies in t!e financial state$ents and t!eir disclos#res. Define events after t!e reporting period. Identify ad&#sting and non'ad&#sting events after t!e reporting period. E plain t!e re"#ire$ents of IAS 1) in relation to acco#nting for events after t!e reporting period and t!eir disclos#res.

IA S 1 )

IA S 3 7

A d & # s t in g E v e n ts

* o n ' a d & # s t in g E v e n ts

I n t r o d # c t io n

+ e c o g n it io n D is c l o s # r e s . e a s# re $ e n t

, ! a n g e s in - r o v is i o n s

A p p li c a t i o n o f t ! e + # le s t o S p e c i f i c , ir c # $ s t a n c e s

D is c lo s # r e s

2.

Provisions
%/

2.1 2.1.1

The nature of provisions efinition -rovisions are liabilities for 0!ic! t!e a!ount or ti!in" of t!e e pendit#re t!at 0ill be #nderta1en is un#ertain ().

2.1.2

2.1.3

It believes t!at provisions are a su$ #%ass of %ia$i%ities and not a separate ele$ent of t!e balance s!eet. &rovisions are 'istin"uishe' fro! other %ia$i%ities $( the un#ertainties invo%ve'. 2!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. 2!e reasoning be!ind t!e $ain re"#ire$ents in IAS 37 is t!at recogni3ing 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. E)a!p%e 1 2rade payables are liabilities to pay for goods t!at !ave been s#pplied4 !o0ever, trade payables are not provision. 2!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$e of placing order 0it! t!e s#pplier. 2!ere s!o#ld !ave s#fficient certainty regarding t!e a$o#nt and ti$ing of settle$ent for t!is transaction.

2.1.%

2.1.(

E)er#ise 1 E plain 0!y accr#als for electricity are liability b#t not provisions. So%ution*

()

2.2 2.2.1

S#ope of IAS +, IAS 37 does not cover t!ose provisions, contingent liabilities and contingent assets t!at5 (i) res#lt fro$ financial instr#$ents t!at are carried at fair val#es4 (ii) res#lt fro$ e ec#tory contracts, e cept 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). Re#o"nition 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.+ 2.3.1

2.3.2

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.

(1

(a) 2.3.3

First criterion present obligation as a result of a past event 2!e present obligation $ay be5 (a) a %e"a% o$%i"ation ( ), or (b) #onstru#tive o$%i"ation (), 0!ere e ist 0!en t!e enterprise !as no realistic alternative to settling t!e obligation created by t!e event. efinitions (a) A %e"a% o$%i"ation is an obligation t!at arises fro! a #ontra#t (t!ro#g! its e plicit 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. A present o$%i"ation arising ot!er t!an fro$ 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 e a$ple, by an esta$%ishe' pattern of
(2

2.3.%

(b)

past pra#ti#e or pu$%ishe' po%i#ies. 2!e enterprise !as indicated to ot!er parties t!at it 0ill accept certain responsibilities, as a res#lt, t!e enterprise !as #reate' a va%i' e)pe#tation on t!e part of t!ose ot!er parties (e.g. c#sto$ers, s#ppliers, e$ployees) t!at it 0ill disc!arge t!ose responsibilities. 2.3.( 2!e past event t!at leads to a present obligation is called an o$%i"atin" event 0 1, 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 e isting independently of an enterprise7s f#t#re actions t!at are recogni3ed as provisions. 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 $( its future a#tions2 no o$%i"atin" event e)ists an' thus no provision shou%' $e re#o"ni-e' . In t!e past, so$e enterprises !ave recogni3ed provisions i$$ediately t!at t!e need for a progra$$e of e pendit#re !as been identified, based on gro#nds of pr#dence. E)a!p%e 2 3 Overhau% #osts 0o$%i"atin" events 'oes not e)ist1 I9 Air0ays is re"#ired #nder t!e legislation of ,o#ntry + to over!a#l its aircraft once every t!ree years. No provision for t!e over!a#l costs s!o#ld be recogni3ed. Even a legal re"#ire$ent to over!a#l does not $a1e t!e costs of over!a#l a liability, beca#se no obligation e ists to over!a#l t!e aircraft independently of t!e enterprise7s f#t#re actions. 2!e over!a#l e pendit#re can be avoi'e' $( IJ Air.a(s/ future a#tions , say by selling t!e aircraft, so t!ere is no present obligation for t!e f#t#re e pendit#re. 2.3.: 2!e follo0ing e a$ples fro$ IAS 37, 0it! so$e $odifications, are #sed for ill#stration. E)a!p%e + 3 Conta!inate' %an' 0%e"a% o$%i"ation1 A; <td is an oil e tracting co$pany. It !as been conta$inating land in ,o#ntry = for several years, b#t t!ere !as !ad no legislation in ,o#ntry = re"#iring cleaning #p. At 31 Dece$ber 2)11 it is virt#ally certain t!at a draft la0 re"#iring a clean'#p of land already conta$inated 0ill be enacted s!ortly after year'end. &resent o$%i"ation as a resu%t of a past o$%i"atin" event > 2!e obligating event is t!e conta$ination ( ) of t!e land beca#se of t!e virt#al certainty of legislation
(3

2.3.8

2.3.7

2.3./

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$%i"ation1 ,D <td. is in t!e oil ind#stry. It operates in a co#ntry 0!ere t!ere is no environ$ental legislation. ?o0ever, t!e co$pany !as a 0idely p#blis!ed environ$ental policy in 0!ic! it #nderta1es to clean #p all conta$ination t!at it ca#ses. 2!e enterprise !as a record of !ono#ring t!is p#blis!ed policy. Re4uire'* Disc#ss 0!et!er t!e provision can be $ade by ,D <td@ So%ution*

(%

2.3.11 E)a!p%e 5 3 C%osure of a 'ivision 0no i!p%e!entation on or $efore $a%an#e sheet 'ate1 6n 18 Dece$ber 2)11 t!e board of EA <td decided to close do0n a division $a1ing a partic#lar prod#ct. ;efore t!e balance s!eet date of 31 Dece$ber t!e decision 0as not co$$#nicated to any of t!ose affected and no ot!er steps 0ere ta1en to i$ple$ent t!e decision. &resent o$%i"ation as a resu%t of a past o$%i"atin" event > 2!ere is no present, constr#ctive, obligation at 31 Dece$ber 2)11, since t!e decision 0as not co$$#nicated to any of t!ose affected and also t!e decision !as not yet been i$ple$ented before t!e balance s!eet date. Con#%usion > *o provision is recognised.

2.3.12 E)er#ise + 3 C%osure of a 'ivision 0#o!!uni#ation6i!p%e!entation $efore $a%an#e sheet 'ate1 6n 18 Dece$ber 2)11, t!e board of B? <td decided to close do0n a division. 6n 2) Dece$ber 2)11 a detailed for$al plan for closing do0n t!e division 0as agreed4 letter 0ere sent to c#sto$ers 0arning t!e$ to see1 an alternative so#rce of s#pply and red#ndancy notices 0ere sent to t!e staff of t!e division. Re4uire'* Disc#ss 0!et!er t!e provisions can be $ade by B? <td@ So%ution*

((

(b)

Second criterion probable outflow of economic resources embodying economic benefits

2.3.13 An o#tflo0 of reso#rces is regarded as pro$a$%e if t!e o#tflo0 is $ore li1ely t!an not to occ#r (i.e. !aving a pro$a$i%it( "reater than 789). 2.3.1% E)a!p%e 7 3 :arranties 0 1 .* <td gives 0arranties at t!e ti$e of sale to p#rc!asers of its prod#ct to repair or replace any defects 0it!in t!ree years fro$ t!e date of sale. 6n past e perience, it is probable (i.e. $ore li1ely t!an not) t!at t!ere 0ill be so$e clai$s #nder t!e 0arranties. &resent o$%i"ation as a resu%t of a past o$%i"atin" event > 2!e obligating event is t!e sale of t!e prod#ct 0it! a 0arranty, 0!ic! gives rise to a legal obligation. An outf%o. of resour#es e!$o'(in" e#ono!i# $enefits in sett%e!ent > -robable for t!e 0arranties as a 0!ole. Con#%usion > A provision is recognised for t!e best esti$ate of t!e costs of $a1ing 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 $ade, a provision is to be recogni3ed. 6nly in e tre$ely rare cases 0ill it be gen#inely i$possible to $a1e a reliable esti$ate and a provision e ists t!at cannot be recogni3ed. In t!is case, t!at liability s!o#ld be disclosed as a contingent liability. 2.5 2.%.1 ;easure!ent <e( points (a) 2!e a$o#nt recogni3ed as a provision s!o#ld be t!e $est esti!ate of t!e e pendit#re re"#ired to settle t!e obligation t!at e isted at t!e balance s!eet date. 2!e esti$ate s!o#ld ta1e into acco#nt5

(b)

(8

(i) (ii)

(c)

(d)

(e)

ris=s an' un#ertainties associated 0it! t!e cas! flo0s e)pe#te' future events (for e a$ple, ne0 tec!nology or ne0 legislation) (iii) 'is#ountin" 0!enever t!e effect of t!is is $aterial. If t!e effect of t!e ti$e val#e of $oney is $aterial, t!en t!e provision s!o#ld be disco#nted. 2!e 'is#ount rate shou%' $e pre>ta) an' ris= spe#ifi# . 2!e ta conse"#ences of t!e provision are dealt 0it! in accordance 0it! IAS 12 CAcco#nting for Deferred 2a D. 2!e un.in'in" of the 'is#ount is a finan#e #ost , and it s!o#ld be disclosed separately on t!e face of t!e state$ent of co$pre!ensive inco$eEinco$e state$ent. -rovisions s!o#ld be revie.e' at ea#h reportin" 'ate and ad&#sted to reflect t!e c#rrent best esti$ate.

2.%.2

E)a!p%e ? 3 eter!ine the a!ount of provisions for a %ar"e popu%ation 6- <td sells goods 0it! a 0arranty #nder 0!ic! c#sto$ers are covered for t!e cost of repairs of any defects t!at beco$e apparent 0it!in t!e first si $ont!s after p#rc!ase. ;ased on past e perience and f#t#re e pectation, it is esti$ated t!at if $inor defects 0ere detected in all goods sold, repair cost of F1) $illion 0o#ld res#lt, b#t if $a&or defects 0ere detected for all t!e goods sold, repair costs of F%) $illion 0o#ld res#lt. 2!e co$pany e pects t!at for t!e year 7(G of t!e goods sold to !ave no defect, 2)G 0it! $inor defects and (G 0it! $a&or defects. 2!e a$o#nt of provisions for 0arranties is t!e e pected val#e of t!e costs of repairs, F%$ (7(G Fnil H 2)G F1)$ H (G F%)$).

@uestion 1 *ette, a p#blic li$ited co$pany, $an#fact#res $ining e"#ip$ent and e tracts nat#ral gas. *ette !as recently constr#cted a nat#ral gas e traction facility and co$$enced prod#ction one year ago (1 9#ne 2))3). 2!ere is an operating licence given to t!e co$pany by t!e govern$ent 0!ic! re"#ires t!e re$oval of t!e facility at t!e end of its life 0!ic! is esti$ated at 2) years. Depreciation is c!arged on t!e straig!t line basis. 2!e cost of t!e constr#ction of t!e facility 0as F2)) $illion and t!e net present val#e at 1 9#ne 2))3 of t!e f#t#re costs to be inc#rred in order to ret#rn t!e e traction site to its original condition are esti$ated at F() $illion (#sing a disco#nt rate of (G per ann#$). :) per cent of t!ese costs relate to t!e re$oval of t!e facility and 2)G relate to t!e rectification of t!e da$age ca#sed t!ro#g! t!e e traction of t!e nat#ral gas. 2!e a#ditors !ave told t!e co$pany t!at a provision for
(7

deco$$issioning !as to be set #p. Re4uire'* E plain 0it! reasons and s#itable e tractsEco$p#tations t!e acco#nting treat$ent of t!e above sit#ation in t!e financial state$ents for t!e year ended 31 .ay 2))%. (: $ar1s) (Adapted A,,A 3.8 Advanced ,orporate +eporting 9#ne 2))% I3(b)(i)) 2.7 2.(.1 Spe#ifi# app%i#ations in pra#ti#e IAS 37 f#rt!er e plains !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$ental provisions4 and (d) restr#ct#ring costs. Future operating losses In t!e past, provisions !ave so$eti$es been recogni3ed 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. 2!ose costs co#ld be avoided by t!e enterprise7s f#t#re actions4 t!#s t!ey do not $eet t!e definition of a liability and t!e general recognition criteria for a provision. Onerous contracts An onero#s contract is a contract entered into 0it! anot!er party #nder 0!ic! t!e #navoidable costs of f#lfilling t!e ter$s of t!e contract e ceed any reven#es e pected to 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. 2!e present obligation #nder an onero#s contract s!o#ld be recogni3ed and $eas#red as a provision. E)a!p%e , 3 Onerous #ontra#t Droopers plc !as recently bo#g!t all of t!e trade, assets and liabilities of Dolittle, an #nincorporated b#siness. As part of t!e ta1e'over all of t!e co$bined b#siness7s

(a) 2.(.2

(b) 2.(.3

2.(.%

(:

activities !ave been relocated at Droopers $ain site. As a res#lt Dolittle7s pre$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!eir pre$ises at F8,))) per calendar $ont!. At 31 Dece$ber 2)1) 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 ta1en over part of t!e pre$ises for t!e rest of t!e lease at a rent of F2,()) per calendar $ont!. Re4uire'* (a) (b) S!o#ld Droopers recogni3e a provision for an onero#s contract in respect of t!is lease@ S!o0 !o0 t!is infor$ation 0ill be presented in t!e financial state$ents for 2)1) and 2)11. Ignore t!e ti$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. 2!erefore an onero#s contract e ists and $#st be provided for. 2!ere is also an a$o#nt recoverable fro$ t!e s#b'tenant of F:),))) (F2,()) 32 $ont!s). 2!is 0ill be s!o0n separately in t!e balance s!eet as an asset. 2!e F1/2,))) payable and t!e F:),))) recoverable can be netted off in t!e inco$e state$ent. (b) In#o!e state!ent -rovision for onero#s contract (net) *et rental payable on lease (72 > 3)) +elease of provision 2)1) F 112,))) Dr ' 112,))) Dr State!ent of finan#ia% position +eceivables A$o#nt recoverable fro$ s#b'tenants 2)11 F ' %2,))) Dr %2,))) ,r '

:),))) Dr

(),))) Dr
(/

<iabilities A$o#nts payable on onero#s contracts

1/2,))) ,r

12),))) ,r

(c) 2.(.(

Environmental provisions Environ$ental provisions are often referred to as clean'#p costs beca#se t!ey #s#ally relate to t!e cost of deconta$inating and restoring an ind#strial site, 0!en prod#ction !as ceased. Nor!a% ru%es in IAS +, app%( (a) (b) (c) A provision is re#o"ni-e' if there is an o$%i"ation (legal or constr#ctive) to repair environ$ental da$age. ;ere%( #ausin" 'a!a"e or inten'in" to clean'#p a site does not #reate an o$%i"ation. An entity !a( have #onstru#tive o$%i"ation to repair environ$ental da$age. 2!is 0ill be t!e case if, for e a$ple, an entity pu$%i#ises po%i#ies t!at incl#de environ$ental a0areness or e plicitly #nderta1es to clean #p t!e da$age ca#sed by its operations. 2!ere !ust have $een a past o$%i"atin" event . A provision can only be set #p to rectify environ$ental da$age t!at !as already !appened. 2!e f#ll cost of an environ$ental provision s!o#ld be recogni3ed as soon as t!e obligation arises. (i) ;eca#se it $ay be $any years before t!e costs relating to t!e provision are paid o#t, t!e effe#t of the ti!e va%ue of !one( is usua%%( !ateria%. 2!erefore, an environ$ental provision is nor$ally disco#nted to its present val#e. (ii) If t!e e)pen'iture resu%ts in future e#ono!i# $enefits , an e4uiva%ent asset #an $e re#o"ni-e'. 2!is is 'epre#iate' over its usefu% %ife, 0!ic! is t!e sa$e as t!e Jlife7 of provision. (iii) *ote t!at IAS 37 is silent on 0!et!er an asset s!o#ld be recogni3ed at t!e sa$e ti$e as a provision. ;#t IAS 18 -roperty, -lant and E"#ip$ent re"#ires #apita%i-ation of the provision if it relates to an ite$ of property, etc.

2.(.8

(d) (e)

8)

2.(.7

E)a!p%e A 3 Environ!enta% provision #ost 6n 1 9an#ary 2)12, 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;, $#st restore t!e "#arry to its nat#ral state. 2!is 0ill cost a f#rt!er F3$. 2!ese costs 0ill be inc#rred on 1 9an#ary 2)1(. A;,7s cost of capital is 1)G. E plain !o0 t!is e pendit#re is treated in t!e financial state$ents of A;,. So%ution* A;, !as a legal obligation (t!e obligating event is t!e ta1ing o#t of t!e licence). 2!erefore, it recogni3es a provision for F3$ at 1 9an#ary 2)12. 2!is provision is disco#nted to its present val#e. Eac! year, t!e disco#nt #n0inds and t!e provision increases. 2!e #n0inding of t!e disco#nt is c!arged to profit as a finance cost. ;ove!ent on provision 6pening balance Ainance cost at 1)G +elease ,losing balance 2812 B888 2,2(3 22( ' 2,%7: 281+ B888 2,%7: 2%/ ' 2,727 2815 B888 2,727 273 ' 3,))) 2817 B888 3,))) ' (3,)))) '

A;, co#ld not carry o#t its "#arrying operation 0it!o#t inc#rring t!e clean'#p costs. 2!erefore, in#urrin" the #osts "ives it a##ess to future e#ono!i# $enefits . It incl#des t!e additional e pendit#re in t!e cost of t!e licence and recogni3es t!is as an asset. 2!e licence is depreciated over t!e t!ree years. ,ost of licence ,as! paid 1 9an#ary 2)12 -K of clean'#p costs at 1 9an#ary 2)12 F))) (,))) 2,2(3

81

2otal 2!e effect on t!e financial state$ents is s!o0n belo0.

7,2(3

In#o!e state!ent Operatin" #osts Depreciation (over 3 years) Cinan#e #osts Ln0inding of disco#nt State!ent of finan#ia% position Non>#urrent assets <icence5 ,ost Acc#$#lated depreciation ,arrying val#e Lia$i%ities ,lean'#p provision

2812 B888 2,%1:

281+ B888 2,%1:

2815 B888 2,%17

2817 B888 '

22(

2%/

273

'

7,2(3 (2,%1:) %,:3(

7,2(3 (%,:38) 2,%17

7,2(3 (7,2(3) '

' ' '

2,%7:

2,727

3,)))

'

(d) 2.(.:

Restructuring costs ()

+estr#ct#ring incl#des ter$inating a line of b#siness, clos#re of b#siness locations, c!anges in $anage$ent str#ct#re, and refoc#sing a b#siness7s operations. 2.(./ In t!e past, provisions !ave fre"#ently been $ade for reorgani3ations and restr#ct#ring. +eorgani3ations $ay incl#de ter$inating a line of b#siness, t!e clos#re of locations 0!ere b#siness is carried on, c!anges in $anage$ent str#ct#re and cost red#ction progra$$es. 2.(.1) A restr#ct#ring is a progra$$e t!at is planned and controlled by $anage$ent and !as a $aterial effect on5 (a) t!e scope of a b#siness #nderta1en by t!e reporting entity in ter$s of t!e prod#cts or services it provides, or (b) t!e $anner in 0!ic! a b#siness #nderta1en by t!e reporting entity is cond#cted.
82

2.(.11 It re"#ires t!at provisions for reorgani3ationErestr#ct#ring s!o#ld be recogni3ed only 0!en an entity is de$onstrably co$$itted to t!e reorgani3ation, i.e., specific actions $#st !ave been ta1en so t!at ot!ers can be e pected to act on t!e basis t!at t!e reorgani3ation 0ill proceed and in so doing, leave t!e entity 0it!o#t realistic possibility of 0it!dra0al.

2.(.12 <e( points (a) Evi'en#e of the #o!!it!ent $ig!t be5 (i) t!e p#blic anno#nce$ent of t!e detailed plan4 (ii) t!e co$$ence$ent of i$ple$entation (e.g., dis$antling plant, selling assets, notifying e ternal parties and co$$#nication to e$ployees)4 (iii) ot!er circ#$stances constr#ctively obliging t!e entity to co$plete t!e reorgani3ation. 2!e 'etai%e' p%an s!o#ld identify (as a !ini!u!)5 (i) t!e $usiness or part of a b#siness concerned4 (ii) t!e prin#ipa% %o#ations affected4 (iii) t!e location, f#nction and appro i$ate nu!$er of e!p%o(ees 0!ose services are to be ter$inated or d#ties c!anged4 (iv) t!e e)pen'itures t!at 0ill be #nderta1en4 and (v) t!e ti!e at 0!ic! t!e plan 0ill be i$ple$ented. I$ple$entation s!o#ld begin as soon as possible and t!e period of ti$e to co$plete i$ple$entation s!o#ld be s#c! t!at significant c!anges to t!e plan are li1ely. A $oar' 'e#ision on its o.n is not a 'e!onstra$%e #o!!it!ent , #nless t!e $e$bers!ip of t!e ;oard contains representatives of interests ot!er t!an $anage$ent, as is t!e case in so$e co#ntries. Announ#e!ent of p%ans to the pu$%i# or to e!p%o(ees !i"ht #onstitute #o!!it!ent , depending on t!e level of detail co$$#nication.

(b)

(c)

2.(.13 -rovisions for reorgani3ations s!o#ld in#%u'e on%( those e)pen'itures t!at are bot!5 (a) necessarily entailed by a reorgani3ation to 0!ic! t!e entity is de$onstrably #o!!itte'4 and (b) not asso#iate' .ith on"oin" or ne. a#tivities of the entit( . E a$ples of costs t!at are not allo0ed incl#de5 retraining or relocating contin#ing staff4
83

invest$ent in ne0 syste$s and distrib#tion net0or1s, etc., beca#se t!ese e pendit#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 2)12 t!e ;oard of Directors of S!ane <td voted to proceed 0it! t0o re'organisation sc!e$es. S!ane <td7s financial year end is 31 .arc!, and t!e financial state$ents 0ill be finali3ed and p#blis!ed on 3) 9#ne. S#he!e 1 2!e clos#re costs 0ill a$o#nt to F12(,))). 2!e factory is rented on a s!ort'ter$ lease, and t!ere 0ill be no gains or losses arising on t!is property. 2!e clos#re 0ill be anno#nced in 9#ne, and 0ill co$$ence in A#g#st. S#he!e 2 2!e costs 0ill a$o#nt to F%(,))) (after crediting F1)(,))) profit on disposal of certain $ac!ines). 2!e clos#re 0ill ta1e place in 9#ly, b#t red#ndancy negotiations began 0it! t!e staff in .arc!. E plain and calc#late t!e year'end restr#ct#ring provision. So%ution* S#he!e 1 > 2!e obligation arises in 9#ne, after t!e year end, and so t!ere 0ill be no provision. ?o0ever, t!e anno#nce$ent in 9#ne s!o#ld be disclosed as an non' ad&#sting event after t!e reporting date. S#he!e 2 > Alt!o#g! t!e clos#re 0ill not begin #ntil 9#ly, t!e e$ployees 0ill !ave !ad a valid e pectation t!at it 0o#ld !appen 0!en t!e red#ndancy negotiations began in .arc!. 2!erefore a provision s!o#ld be recognised. 2!e provision 0ill be for F1(),))) beca#se t!e e pected profit on disposal cannot be netted off against t!e e pected costs.

8%

2.(.1( E)er#ise 5 3 ;easurin" restru#turin" provisions 6n 1 6ctober 2))7 t!e ;oard of .* <td resolved to close t!e loss'$a1ing engineering division. A binding agree$ent to dispose of t!e assets 0as signed on 7 6ctober 2))7. 2!e sale 0ill be co$pleted on 1% .arc! 2)): at an agreed val#e of F3) $illion. 2!e esti$ated costs of t!e clos#re are5 red#ndancy, F2 $illion4 penalty costs for non'co$pletion of contracted orders, F3 $illion4 related professional costs, F1.( $illion4 losses on t!e sale of t!e net assets and liabilities, 0!ose carrying a$o#nt at t!e balance s!eet date of 31 Dece$ber 2))7 0as F88 $illion and F2) $illion respectively4 and esti$ated operating losses for t!e period fro$ 1 9an#ary 2)): to t!e date of sale, F%.( $illion. Re4uire'* Ca%#u%ate the provisions ;N Lt' shou%' $e !a'e. So%ution*

8(

@uestion 2 =ader !as decided to close one of its overseas branc!es. A board $eeting 0as !eld on 3) April 2))7 0!en a detailed for$al plan 0as presented to t!e board. 2!e plan 0as for$alised and accepted at t!at $eeting. <etters 0ere sent o#t to c#sto$ers, s#ppliers and 0or1ers on 1( .ay 2))7 and $eetings 0ere !eld prior to t!e year end to deter$ine t!e iss#es involved in t!e clos#re. 2!e plan is to be i$ple$ented in 9#ne 2))7. 2!e co$pany 0is!es to provide F: $illion for t!e restr#ct#ring b#t are #ns#re as to 0!et!er t!is is per$issible. Additionally t!ere 0as an iss#e raised at one of t!e $eetings. 2!e operations of t!e branc! are to be $oved to anot!er co#ntry fro$ 9#ne 2))7 b#t t!e operating lease on t!e present b#ildings of t!e branc! is non'cancellable and r#ns for anot!er t0o years, #ntil 31 .ay 2))/. 2!e ann#al rent of t!e b#ildings is F1(),))) payable in arrears on 31 .ay and t!e lessor !as offered to ta1e a single pay$ent of F27),))) on 31 .ay 2)): to settle t!e o#tstanding a$o#nt o0ing and ter$inate t!e lease on t!at date. =ader !as additionally obtained per$ission to s#blet t!e b#ilding at a rental of F1)),))) per year, payable in advance on 1 9#ne. 2!e co$pany needs advice on !o0 to treat t!e above #nder IAS 37 J-rovisions, ,ontingent <iabilities and ,ontingent Assets7. Re4uire'* Disc#ss t!e acco#nting treat$ents of t!e above ite$s in t!e financial state$ents for t!e year ended 31 .ay 2))7. (7 $ar1s) *ote5 a disco#nt rate of (G s!o#ld be #sed 0!ere necessary. ,andidates s!o#ld s!o0 s#itable calc#lations 0!ere necessary. (A,,A 3.8 Advanced ,orporate +eporting 9#ne 2))7 I2(d))

88

3.
+.1 3.1.1

Contingent Liabilities and Contingent Assets

Contin"ent %ia$i%ities efinition A #ontin"ent %ia$i%ities is defined in IAS 37 as5 (a) a possi$%e obligation t!at arise fro! past events and .hose e)isten#e .i%% $e #onfir!e' on%( $( the o##urren#e or non>o##urren#e of one or !ore un#ertain future events not .ho%%( .ithin the #ontro% of the enterprise4 or (b) a present obligation t!at arises fro! past events b#t is not re#o"ni-e' beca#se it is not pro$a$%e t!at an outf%o. of resour#es e$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. E)a!p%e 18 3 Contin"ent %ia$i%ities (i) <itigation > -ending or t!reatened litigation needs to be disclosed. 2!e nat#re of t!e litigation $ay ta1e $any for$s, s#c! as da$age to t!e environ$ent (e.g. poll#ting air, rivers, etc.) B#arantees > ,o$panies often g#arantee t!e liabilities of ot!ers. Aor e a$ple, co$panies (#s#ally 0it!in a gro#p) often g#arantee eac! ot!er7s ban1 borro0ings or overdrafts. Disco#nted bills > If t!e co$pany !as disco#nted bills of e c!ange 0it! reco#rse, t!ere is al0ays t!e possibility t!at t!e co$pany 0ill be called #pon to !ono#r its pro$ise.

3.1.3

(ii)

(iii)

87

+.2 3.2.1

Contin"ent assets efinition A #ontin"ent asset is 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

3.2.3

,ontingent assets are not re#o"ni-e' in finan#ia% state!ents beca#se to do so co#ld res#lt in t!e recognition of inco$e t!at $ay never be reali3ed. A contingent asset is to be disclosed 0!ere an inflo0 of econo$ic benefits is probable. 2!e acco#ntingEdisclos#re re"#ire$ents are s#$$ari3ed in t!e follo0ing table5 e"ree of pro$a$i%it( of an outf%o.6inf%o. of resour#es Kirt#ally -robable -ossible +e$ote Outf%o. <iability <iability Disclose by note *o disclos#re Inf%o. Asset Disclose by note *o disclos#re *o disclos#re

@uestion + Breenie, a p#blic li$ited co$pany, b#ilds, develops and operates airports. D#ring t!e financial year to 3) *ove$ber 2)1), a section of an airport collapsed and as a res#lt several people 0ere !#rt. 2!e accident res#lted in t!e clos#re of t!e ter$inal and legal action against Breenie. =!en t!e financial state$ents for t!e year ended 3) *ove$ber 2)1) 0ere being prepared, t!e investigation into t!e accident and t!e reconstr#ction of t!e section of t!e airport da$aged 0ere still in progress and no legal action !ad yet been bro#g!t in connection 0it! t!e accident. 2!e e pert report t!at 0as to be presented to t!e civil co#rts in order to deter$ine t!e ca#se of t!e accident and to assess t!e respective responsibilities of t!e vario#s parties involved, 0as e pected in 2)11. Ainancial da$ages arising related to t!e additional costs and operating losses relating to t!e #navailability of t!e b#ilding. 2!e nat#re and e tent of t!e da$ages, and t!e details of any co$pensation pay$ents !ad yet to be establis!ed. 2!e directors of Breenie felt t!at at present, t!ere 0as no re"#ire$ent to record t!e i$pact of t!e accident in t!e financial state$ents.

8:

 ,o$pensation agree$ents !ad been arranged 0it! t!e victi$s, and t!ese clai$s 0ere all covered by Breenie7s 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 its ins#rers. If any co$pensation is event#ally payable to t!ird parties, t!is is e pected to be covered by t!e ins#rance policies. 2!e directors of Breenie felt t!at t!e conditions for recognising a provision or disclosing a contingent liability !ad not been $et. 2!erefore, Breenie did not recognise a provision in respect of t!e accident nor did it disclose any related contingent liability or a note setting o#t t!e nat#re of t!e accident and potential clai$s in its financial state$ents for t!e year ended 3) *ove$ber 2)1). 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 2)1). (8 $ar1s) A,,A -2 ,orporate +eporting Dece$ber 2)1) I3(a))

4.
5.1 %.1.1

Disclosure Re uire!ents
&rovision Aor 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 e isting 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$e and t!e effect of any c!ange in t!e disco#nt rate4 (b) a brief description of t!e nat#re of t!e obligation and t!e e pected ti$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 e pected rei$b#rse$ent, starting t!e a$o#nt of any asset t!at !as been recogni3ed for t!at e pected rei$b#rse$ent.

8/

5.2 %.2.1

Contin"ent %ia$i%it( =!ere a contingent liability is disclosed, t!e enterprise is to provide a brief description of t!e nat#re of t!e contingent liability. In addition, t!e follo0ing infor$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$ent. Contin"ent asset =!ere a contingent asset is disclosed, t!e follo0ing infor$ation is re"#ired5 (a) a brief description of t!e nat#re of t!e contingent asset4 and (b) an esti$ate of its financial effect > 0!ere t!is is not disclosed beca#se it is not practicable to do so, t!at fact s!o#ld be stated. 2!e 2ent! Sc!ed#le to t!e ,o$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.

5.+ %.3.1

%.3.2

".
(.1

Events after the Reporting Period

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!ori3ed for iss#e ( ). 2!ere are t0o types of s#c! events5 (i) a'Eustin" events 0 1 > t!ose providing f#rt!er evidence of conditions t!at e isted at t!e end of t!e reporting period. 2!ese events $#st be ad&#sted for in t!e financial state$ents.
7)

(b)

(ii)

non>a'Eustin" events 0 1 > t!ose t!at are indicative of conditions t!at arose after t!e reporting period. 2!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. E)a!p%e 11 2!e $anage$ent of an entity co$pletes draft financial state$ents for t!e year to 31 Dece$ber 2))7 on 2: Aebr#ary 2)):. 6n 1: .arc! 2)):, t!e board of directors revie0s t!e financial state$ents and a#t!orises t!e$ for iss#e. 2!e entity anno#nces its profit and selected ot!er financial infor$ation on 1/ .arc! 2)):. 2!e financial state$ents are $ade available to s!are!olders and ot!ers on 1 April 2)):. 2!e s!are!olders approve t!e financial state$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)):. 2!e financial state$ents are a#t!orised for iss#e on 1: .arc! 2)): (date of board a#t!orisation for iss#e).

(.3

(.%

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'e ec#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!ori3es t!e$ for iss#e to t!e s#pervisory board. E)er#ise 7 6n 1: .arc! 2)):, t!e $anage$ent of an entity a#t!orises financial state$ents for iss#e to its s#pervisory board. 2!e s#pervisory board is $ade #p solely of non' e ec#tives and $ay incl#de representatives of e$ployees and ot!er o#tside interests. 2!e s#pervisory board approves t!e financial state$ents on 28 .arc! 2)):. 2!e financial state$ents are $ade available to s!are!olders and ot!ers on 1 April 2)):. 2!e s!are!olders approve t!e financial state$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)):.

(.(

71

=!en is t!e date of a#t!ori3ation for t!e iss#ance of financial state$ents@

7.? (.8.1

E)a!p%es of a'Eustin" events 2!e follo0ing e a$ples are nor$ally classified as ad&#sting events5 (a) Ai ed 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 recogni3e 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 $a1e s#c! pay$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. E)a!p%e 12 A $a&or c#sto$er 0ent into li"#idation on 28 April 2)):. 2!e c#sto$er7s balance at 31 .arc! 2)): re$ains #npaid. 2!e receiver !as inti$ated t!at #nsec#red payables 0ill receive very little co$pensation, if any. Re4uire'* E plain !o0 t!e above $atter s!o#ld be dealt 0it! in t!e financial state$ents for t!e year ended 31 .arc! 2)):. So%ution* 2!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. 2!e li"#idation is t!erefore an ad&#sting event, and t!e a$o#nt of bad debt s!o#ld be 0ritten off in t!e co$pany7s financial state$ent for t!e year ended 31 .arc! 2)):.

(.8.2

72

7., (.7.1

E)a!p%es of non>a'Eustin" events 2!e follo0ing e a$ples are classified as non'ad&#sting events5 (a) ;#siness co$binations (b) +estr#ct#ring (c) Discontin#ing operations (d) -#rc!ases or disposal of assets (e) Aire (f) S!are transactions (g) Aoreign e c!ange > abnor$al large c!anges in asset prices or foreign e c!ange rates (!) 2a > c!anges in ta ratesEla0s (i) ,o$$it$ents or contingent liabilities (&) <itigation E)a!p%e 1+ A fire bro1e o#t at t!e co$pany7s factory on % April 2)):. 2!is !as destroyed t!e factory7s ad$inistration bloc1. .any of t!e costs inc#rred as a res#lt of t!is fire are #nins#red. Re4uire'* E plain !o0 t!e above $atter s!o#ld be dealt 0it! in t!e financial state$ents for t!e year ended 31 .arc! 2)):. So%ution* 2!e fire bro1e o#t on % April 2)):, after end of t!e reporting period of 31 .arc! 2)):, so t!is is an event after t!e reporting period #nder IAS 1). .oreover, t!ere is no evidence of a fire secretly si$$ering at end of t!e reporting period and e ploding into life on % April 2)):4 t!e evidence is t!at t!ere 0as no fire at 31 .arc!. 2!erefore, details of t!e fire s!o#ld be disclosed in a note to t!e acco#nts, so t!at reader can !ave a proper #nderstanding of t!e co$pany7s affairs.

(.7.2

73

(.7.3

E)er#ise ? IAS 1) reg#lates t!e e tent 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'ad&#sting@ 1. 2. 3. %. (. Insolvency of a debtor 0!ose acco#nt receivable 0as o#tstanding at end of t!e reporting period. Iss#e of s!ares or loan notes. ,!anges in foreign e c!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.A (a) (.:.1

Other re%ate' issues ate of authori!ation for issue An enterprise is re"#ired to disclose5

7%

(a) (b)

t!e date 0!en t!e financial state$ents 0ere a#t!ori3ed for iss#e, and 0!o gave t!at a#t!ori3ation.

7(

(b) (.:.2

"roposed dividends 6rdinary s!are dividends t!at are proposed or declared after t!e balance s!eet date s!o#ld not be recogni3ed as a liability in t!e balance s!eet. 2!e reason is t!at s#c! proposed dividends do not $eet t!e recognition criteria of a liability. 2!e enterprise does not !ave a present obligation at t!e balance s!eet date in respect of dividends proposed or declared after t!e balance s!eet date. 2!ese dividends s!o#ld be disclosed in a note to t!e financial state$ents. #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$ents s!o#ld not be ad&#sted 0!ere an event after t!e balance s!eet date indicates t!at t!e going concern ass#$ption is not appropriate only for part of t!e enterprise. is#%osure re4uire!ents $d%usting events Separate disclos#re of ad&#sting events is not re"#ired as t!ey do not $ore t!an provide additional evidence in s#pport of ite$s already recogni3ed in t!e financial state$ents. &on'ad%usting events In respect of eac! non'ad&#sting 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 $a1e s#c! an esti$ate.

(.:.3 (c) (.:.%

(.:.(

7.D (a) (./.1

(b) (./.2

78

A''itiona% E)a!ination St(%e @uestions

@uestion 5 Delta is an entity t!at prepares financial state$ents to 31 .arc! eac! year. D#ring t!e year ended 31 .arc! 2)12 t!e follo0ing events occ#rred5 (a) 6n 1 April 2)11, Delta p#rc!ased so$e land for F1) $illion. Delta p#rc!ased t!e land in order to e tract $inerals fro$ it. D#ring t!e si $ont!s fro$ 1 April 2)11 to 3) Septe$ber 2)11, Delta inc#rred costs totaling F3M( $illion in preparing t!e land and erecting e traction e"#ip$ent. 2!is process ca#sed so$e da$age to t!e land. Delta began e tracting t!e $inerals on 1 6ctober 2)11 and t!e directors esti$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. A#rt!er da$age to t!e land is ca#sed as t!e $inerals are e tracted. Delta is legally obliged to rectify t!e da$age ca#sed by t!e preparation and $ineral e traction. 2!e directors esti$ate t!at t!e costs of t!is rectification on 3) Septe$ber 2)21 0ill be as follo0s5 (i) (ii) F3 $illion to rectify t!e da$age ca#sed by t!e preparation of t!e land. F2)),))) for eac! year of t!e e traction process to rectify da$age ca#sed by t!e e traction process itself.

Aollo0ing t!is rectification 0or1 t!e land co#ld potentially be sold to a t!ird party for no less t!an its original cost of F1) $illion. An ann#al disco#nt rate appropriate for t!is pro&ect is 12G. 2!e present val#e of F1 payable in 1) years7 ti$e 0it! an ann#al disco#nt rate of 12G is 32M2 cents. 2!e present val#e of F1 payable in /N years7 ti$e 0it! an ann#al disco#nt rate of 12G is 3%M1 cents. (/ $ar1s) At 31 .arc! 2)12, Delta 0as engaged in a legal disp#te 0it! a c#sto$er 0!o alleged t!at Delta !ad s#pplied fa#lty prod#cts t!at ca#sed t!e c#sto$er act#al financial loss. 2!e directors of Delta consider t!at t!e c#sto$er !as a 7(G c!ance of s#cceeding in t!is action and t!at t!e li1ely 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 $illion. 2!e directors of Delta f#rt!er believe t!at t!e fa#lt in t!e prod#cts 0as ca#sed by t!e s#pply of defective co$ponents by one of Delta7s s#ppliers. Delta !as initiated legal action against t!e s#pplier and considers t!ere is a 7)G 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 $ar1s)

(b)

77

(c)

6n 1) April 2)12, a 0ater lea1 at one of Delta7s 0are!o#ses da$aged a consign$ent of inventory. 2!is inventory !ad been $an#fact#red prior to 31 .arc! 2)12 at a total cost of F:)),))). 2!e net realisable val#e of t!e inventory prior to t!e da$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'pac1aging t!e inventory. 2!e inventory 0as sold on 1( .ay 2)12 for proceeds of F/)),))). Any ad&#st$ent in respect of t!is event 0o#ld be regarded by Delta as $aterial. (3 $ar1s)

Re4uire'* E plain and s!o0 !o0 t!e t!ree events 0o#ld be reported in t!e financial state$ents of Delta for t!e year ended 31 .arc! 2)12. (A,,A Diplo$a in Int7l Ainancial +eporting 9#ne 2)12 I2(a),(c) and (d))

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