MODULE 8

Accounting for Liabilities

 IAS 37 - Provisions, contingent assets and contingent liabilities
What you will
IAS 19 – Employee benefits
learn

IAS 12 – Income taxes

IFRS 2 - Share Based payments

 IAS 37
Provisions, contingent assets and liabilities
IAS 37

Liability
• Present obligation as a result of past events, for which
• Cause future outflows

Provision
• A liability of uncertain timing or amount.

Contingent assets
• A possible asset that arises from past events

Contingent liability
• A present obligation that is not probable or cannot be measured reliably
 IAS 37

Remote Possible Probable Certain

0 – 10% 11 – 50% 51– 90% 91 – 100%

Liability - - - Account for

Provisions - - Account for -

Contingent liabilities - Disclose - -

Contingent Assets - - Disclose -

Provision

Recognition

• Present obligation
• Legal
• Constructive
• Probable outflow
• Reliable estimate

Measurement

• Best estimate of expenditure

• Most likely outcome
• Expected values
 Example: 8.1

A customer has brought a lawsuit against Bone Co and is claiming $800,000 in damages. Bone Co’s legal

advisors have assessed the probability of Bone Co losing and having to pay the damages at 80%.

A washing machine manufacturer offers a free one year warranty with goods supplied. In 20X1 it supplied

100,000 machines. It is expected that in 20X2 15% of these will require minor repairs at an average cost of

$50 and 4% will require major repairs at an average cost of $150.

 Application

Future operating losses

Onerous contracts

Restructuring

Standard warranties

Dismantling costs
 Example: 8.2

Transit Co operates several bus routes in a foreign country. New laws were introduced there on 1

October 20X4 requiring seatbelts to be fitted to all public buses. Non-compliance would result in fines.

The authorities have been vigilant in checking buses and charging fines since the law was introduced.

At the year ended 31 December 20X4, Transit Co has only installed seat belts on half of its buses.

The cost to install them in the other half is $40,000. Unless the seat belts are installed the company is

liable for fines of $25,000.

 IAS 19
Employee Benefits
 IAS 19

The Basic Principle

• Accrual principle

This Standard applies to all employee benefits except IFRS 2

• Short-term employee benefits

• Post-employment benefits (pensions)

• Other long-term benefits

• Termination benefits
Types of benefits
 Accounting

…
 IAS 12
Income Taxes
IAS 12

Taxes

Current Deferred
Taxes Taxes

Temporary Permanent
differences Differences

Asset base Tax base

 Accounting

Tax liability Tax Asset

Assets CV > Tax base CV < Tax base

Liabilities CV < Tax base CV > Tax base

 Example: 8.3

Luella Co buys an item of plant on 1 January 20X7 at a cost of $400,000. The plant has a useful life of

10 years and benefits from a 20% writing down allowance (on a reducing balance basis) for tax purposes.

Luella has a year end of 31 December and pays tax at a rate of 30%.
 Example: 8.4

Suppose that a company, Acrobat, applies IFRS Standards. It purchases a machine for £10,000 in early 20X8.

• The machine is expected to last for ten years and to have no residual value
• The accounting year is the calendar year
• The company is fairly small and is able to claim 40% tax depreciation (capital allowances) in the year of
purchase.
Suppose also, that Acrobat buys land at £3m in early 20X8, and revalues it to fair value of £5m at 31
December 20X8.
I. Calculate the temporary difference relating to the machine at 31 December 20X8.
II. Calculate the temporary difference relating to the land at 31 December 20X8.
 IFRS 2
Share Based Payments
 IFRS 2

Equity settled share based payments

• Equity instruments against good or services received

• Recognize in equity

Cash settled share based payments

• Cash payments against good or services received

• Recognize in liability

Share based payments

• Choice between cash or equity

• Recognize as convertible instruments – split accounting
 Measurement
Share based
payments

Already
Employee Third party
received

Fair value of equity Recognize full on the Fair value of good

on grant date grant date or services received
 Example: 8.5

A company grants three directors 200 share options on 1 January 20X6, and these vest (i.e. the director

becomes entitled to them) after two years, providing that the director still works for the company. This is

expected to be the case. Each option has a fair value of $3 at the grant date.
 Example: 8.6

On 1 January 20X4 a company grants a director share appreciation rights whereby she is entitled to cash

equivalent to 1,000 shares on 31 December 20X5, assuming she remains in employment.

The share price is $3.40 on 31 December 20X4 and $4.05 on 31 December 20X5.