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December 24, 2020

ias 37 acca

However, IAS 37 is often a key standard in FR exams, and candidates must be prepared to wrestle with applying the criteria. In other words, if there is no past event, then there is no liability and no provision should be recognized. To avoid this, the accountant may be tempted to make some provisions for some potential future expenses of $3m, with the impact of making the profit seem lower in the current period. Careful attention must also be paid to the calculations involved in the recording of a provision, particularly those around long-term provisions and including them at present value. Finally, it will examine some specific issues which are often assessed in relation to the standard. The accountant knows that if Rey Co  reports a profit of $13m, directors will not get any more of a bonus than if they reported $10m. On 31 December 20X8, Rey Co should record the provision at $10m/1.10, which is $9.09m. 1. This quiz is a sample of our larger question bank of 50+ questions on IAS 37. As soon as an entity is aware that a contract is onerous, the full loss should be provided for as a liability in the statement of financial position. As the double entry for a provision is to debit an expense and credit the liability, this would potentially reduce the profit down to $10m. So far, all of the items considered in this article have involved the provision being recorded as a liability with the debit being shown as an expense in the statement of profit or loss. Free sign up Sign In. Rey Co has a published environmental policy. IAS 37 stipulates the criteria for provisions, contingent liabilities and contingent assets which must be met in order for a provision to be recognised, so that companies should be prevented from manipulating profits. It can be seen here that Rey Co could only recognise an asset from a potential inflow if it is virtually certain. Rey Co could not provide for any possible claims which may arise from injuries in the future. C3. He also knows that the profit target will be set at $14m in the next year. The global body for professional accountants, Can't find your location/region listed? If the employees have not been informed, then the company could change its mind. IAS 37 provides guidance in the interpretation of the definition of a liability where, for example, an obligation is not legally enforceable or is conditional on the future actions of the entity. In this case, the provision should be included within the original cost of the asset, as this is directly attributable to the construction of that asset. Finally, it will examine some specific issues which are often assessed in relation to the standard. This is because there will not be a one-off payment, so Rey Co should calculate the estimate of all of the likely repairs. Then in the next year, the chief accountant could reverse this provision, by debiting the liability and crediting the profit or loss. Therefore the liability is increased by 10% over the year, giving an increase of $910k which would be recorded in finance costs. IAS 37 – Example (restructuring) – ACCA Financial Reporting (FR) So far, all of the items considered in this article have involved the provision being recorded as a liability with the debit being shown as an expense in the statement of profit or loss. The second issue consideration is which costs should be included within the provision. If the item is made up of a number of items, such as a warranty provision for repairing goods, the expected value should be calculated using the probability of all events happening. If the time value of money is material, generally if the potential outflow is payable in one year or more, the provision should be discounted to present value initially. Likewise it is unlikely that an entity will be able to avoid recording a liability when there is an obligation by claiming there is no way of producing an estimate of the amount. Please visit our global website instead. ... ACCA … IFRS 11 Joint Arrangements That is because there is no past event which has created the obligation. BPP BUSINESS SCHOOL 3 IAS 37 Provisions and contingencies Constructive obligation • 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 that it will discharge those responsibilities This is effectively an attempt to move $3m profit from the current year into the next period. Careful attention must also be paid to the calculations involved in the recording of a provision, particularly those around long-term provisions and including them at present value. These costsshould exclude any costs associated with any continuing activities. EPS as a performance measure. A contingent liability is simply a disclosure note shown in the notes to the accounts. According to IAS 37, 3 criteria are required to be met before a provision can be recognised. IAS 27 Separate Financial Statements. The chief accountant of Rey Co has reviewed the profit to date and realises they are likely to achieve profits of $13m. ... 8:54. Even though there is a similar likelihood that Rey Co would win the counterclaim, this is a probably inflow and therefore only a contingent asset can be recorded. Therefore there cannot be included in the financial statemets. This obligation has a present value of $20m. FREE Courses Blog. ACCA CIMA CAT DipIFR Search. Group accounting – part 2. The obligation could be a legal or contractual one, arising from a court case or some kind of contractual arrangement. In reality a virtually certain inflow is unlikely. In this, Rey Co explains that they always replant trees to counter-balance the environmental damage created by their operations. IAS 37 Provisions, Contingent Liabilities and Contingent Assets, excludes from its scope contracts which are executory in nature, and therefore prevents the recognition of a liability. A probable outflow simply means that it is more likely than not that the entity will have to pay money out. As the double entry for a provision is to debit an expense and credit the liability, this would potentially reduce the profit down to $10m. Instead, a description of the event should be given to the users with an estimate of the potential financial effect. Which of the following statements about the requirements of IAS 37 Provisions, contingent liabilities and contingent assets are correct? IAS 37 – Provisions, contingent liabilities and contingent assets For some ACCA candidates, specific IFRS® standards are more favoured than others. 6:22. During this training session the participants will obtain a comprehensive understanding of the detailed requirements of these standards. The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount. Rey Co’s legal advisors continue to believe that it is likely that Rey Co will lose the court case against the employee and have to pay out $10m. Ongoing costs such as the costs of relocating staff should be excluded from the provision and should instead be expensed as they are incurred. Written by a member of the Financial Reporting examining team, Virtual classroom support for learning partners, IAS 37 – Provisions, contingent liabilities and contingent assets, There needs to be a present obligation from past event. C2. Where the effect of the time value of money is material, the amount of a provision should be the present value of the expenditures expected to be required to settle the obligation. Here, Rey Co would capitalise the $170m as part of property, plant and equipment. IFRS 2 Share-based Payment . Note: Your answer should briefly set out the nature of financial capital in integrated reports. This rule has two parts, first the type of obligation, and second, the requirement for it to come from a past event (something must have already have  happened to create the obligation). Provisions from past papers in ACCA FR (F7). The legal advisors believe that there is an 80% chance that the counter claim against the manufacturer is likely to succeed, and believe that Rey Co would win $8m. This quiz will help you cover the theoretical and conceptual aspects of IAS 37 Provisions and Contingencies. A provision is a liability of uncertain timing or amount, meaning that there is some question over either how much will be paid or when this will be paid. Even if the country has no legal regulations forcing Rey Co to replant trees, Rey Co will have a constructive obligation because it has created an expectation from its publications, practice and history. The expected cost of minor repairs would be $10k (10% of $100k) and the expected costs of major repairs is $50k (5% of $1m). the entity has a present obligation. IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions, together with contingent assets and contingent liabilities. The key difference is that a contingent asset is only recorded if there is a probable future inflow, rather than a possible one. Comments on the proposed changes are re… Like a contingent liability, a contingent asset is simply disclosed rather than a double entry being recorded. The global body for professional accountants, Can't find your location/region listed? In summary, IAS 37 is a key standard for FR candidates. This site uses cookies. If the item is made up of a number of items, such as a warranty provision for repairing goods, the expected value should be calculated using the probability of all events happening. During 20X8, Rey Co opened a new factory, leading to some environmental damage. On 31 December 20X8, Rey Co should record the provision at $10m/1.10, which is $9.09m. with a … This will be disclosed in the notes to the financial statements rather than being recorded as an asset in the statement of financial position. On average, 10% need minor repairs, and 5% need major repairs. Please visit our global website instead, Can't find your location listed? Rey Co has a published environmental policy. Rey Co constructed an oil platform in the sea on 1 January 20X8 at a cost of $150m. This article will consider the aims of the standard, followed by the key specific criteria which must be met for a provision to be recognised. Even if the country has no legal regulations forcing Rey Co to replant trees, Rey Co will have a constructive obligation because it has created an expectation from its publications, practice and history. These are: These criteria will now be examined in further detail to see how they can be applied in practice. Likewise it is unlikely that an entity will be able to avoid recording a liability when there is an obligation by claiming there is no way of producing an estimate of the amount. IAS 37 Provisions, Contingent Liabilities and Contingent Assets 2017 - 07 5 In the Notes to the financial statement: (d) Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the end of the financial reporting period … Similar to the concept of a contingent liability is the concept of a contingent asset. If candidates are able to do this, then provisions can be an area where they can score highly in the FR exam. This is where a company establishes an expectation through an established course of past practice. Rey Co constructed an oil platform in the sea on 1 January 20X8 at a cost of $150m. Like a contingent liability, a contingent asset is simply disclosed rather than a double entry being recorded. IFRS 3 Business Combinations . In this case, Rey Co would provide $10m, being the most likely outcome. probable ( >50% ) outflow of resources. more than 50% likely) that the obligation will result in an outflow of … Clearly this is not good for the users of the financial statements, as they would have been manipulated and given a false impression of the performance of the business. Rey Co’s legal advisors continue to believe that it is likely that Rey Co will lose the court case against the employee and have to pay out $10m. As part of obtaining permission to construct the platform, Rey Co has a legal obligation to remove the asset at the end of its useful life. If the employees have not been informed, then the company could change its mind. The key here is whether the restructuring has been announced to the affected employees. It can be seen here that Rey Co could only recognise an asset from a potential inflow if it is virtually certain. This is where IAS 37 is used to ensure that companies report only those provisions that meet certain criteria. In addition to this, the discount on the provision will be unwound and the provision increased each year. ACCA F7 Video Lectures 2017 ACCA F7 Video Lectures 2017 Welcome to you all, now… Very Important Examiner Tips for PM, FR, AA and FM Examiner tips for PM PM exam sitters should remember to… Latest ACCA DipIFR Book and Exam Kit 2019 Latest ACCA DipIFR Book and … Similarly, if Rey Co has to pay to install new safety equipment in the factory in 20X9, there is no present obligation to do this in 20X8, so no provision is required. Rey Co would have to provide for a potential legal case arising from an employee who was injured at work in 20X8 due to faulty equipment. Rey Co has received legal advice that the most likely outcome of the court case from the employee is that they will lose the case and have to pay $10m. 10. ACCA CIMA CAT DipIFR Search. Acowtancy. All subject exam questions. As only $150m has been paid, this amount would be credited to cash, with a $20m provision set up. C2. Here, Rey Co would capitalise the $170m as part of property, plant and equipment. FREE Courses Blog. Similarly, if Rey Co has to pay to install new safety equipment in the factory in 20X9, there is no present obligation to do this in 20X8, so no provision is required. IAS 37 full text Outlines the accounting for: (IAS 37 definition) Provisions ; is a liability with uncertain timing or amount. Rey Co estimate that the damage will cost $400,000 to restore. The main rule to follow is that if the item is a one-off item, the best estimate will be the most likely outcome. Rey Co has a consistent history of honouring this policy. In this case, Rey Co would include a provision for the $10m loss in liabilities. Therefore there is no present obligation to incur the costs associated with this. In this case, Rey Co would include a provision for the $10m loss in liabilities. There is no specific list of what % likelihood is required for an outflow to be probable. In reality a virtually certain inflow is unlikely. In this, Rey Co explains that they always replant trees to counter-balance the environmental damage created by their operations. This is because the event arose in 20X8 which could lead to an obligation. They believe there is a 10% chance of having to pay $12m, and a 10% chance of paying nothing. These are: These criteria will now be examined in further detail to see how they can be applied in practice. There is no double entry recorded in respect of this. Instead, a description of the event should be given to the users with an estimate of the potential financial effect. In this situation, a contingent liability would be reported. Past experience shows that Rey Co needs to do no repairs on 85% of the goods. The obligation needs to have arisen from a past event, rather than simply something which may or may not arise in the future. This is because the event arose in 20X8 which could lead to an obligation. To avoid this, the accountant may be tempted to make some provisions for some potential future expenses of $3m, with the impact of making the profit seem lower in the current period. Future operating losses do not meet the criteria for a provision, as there is no obligation to make these losses. Here, the provision would be measured at $60k. For example, in the case of an insurance claim where Rey Co can show they have cover. In an exam, it is unlikely that there will not be a reliable estimate. Written by a member of the Financial Reporting examining team, Virtual classroom support for learning partners, IAS 37 – Provisions, contingent liabilities and contingent assets, There needs to be a present obligation from past event. Therefore there cannot be included in the financial statemets. ACCA BT F1 MA F2 FA F3 LW F4 Eng PM F5 TX F6 UK FR F7 AA F8 FM F9 SBL SBR INT SBR UK AFM P4 APM P5 ATX P6 UK AAA P7 INT AAA P7 UK. By 31 December 20X9, when Rey Co is required to make the payment, the liability should be showing at $10m, not $9.09m. IAS 33 Bonus issue. Register; Log In; CPD IAS 37 - Provisions, Contingent Liabilities and Assets ... IAS 37 — Provisions, Contingent Liabilities and Assets 4 Steps ondemand_video Determining a Provision 15m 19s playlist_add_check Quiz - Determining a Provision 5 Questions The main rule to follow is that if the item is a one-off item, the best estimate will be the most likely outcome. The table below shows the treatment for an entity depending on the likelihood of an item happening. Other candidates may calculate an expected value based on the various probabilities. The expected cost of minor repairs would be $10k (10% of $100k) and the expected costs of major repairs is $50k (5% of $1m). The final criteria required is that there needs to be a probable outflow of economic resources. Rey Co could delay the work until 20X9, or sell the building. For example, let’s take a fictional company, Rey Co. At the start of the year, Rey Co sets a profit target of $10m for the year ended 31 December 20X8. 7:18. Restructuring costs associated with reorganising divisions provide two issues. Then in the next year, the chief accountant could reverse this provision, by debiting the liability and crediting the profit or loss. As only $150m has been paid, this amount would be credited to cash, with a $20m provision set up. During 20X8, Rey Co opened a new factory, leading to some environmental damage. IAS 37 standard sets out the recognition, measurement and disclosure requirements of provisions, and it also deals with contingent assets and contingent liabilities. Rey Co has a cost of capital of 10%. The exception to this is if an entity creates an obligation for future costs due to the construction of a non-current asset. This e-learning course is part of an e-learning series designed by PwC Academy Hungary which aims to provide a comprehensive overview of the application of IFRS (IAS) standards to finance and accounting experts who are already familiar with fundamental (local) accounting and reporting processes. Whilst this seems inconsistent, this demonstrates the asymmetry of prudence, that losses will be recorded earlier than potential gains. These costsshould exclude any costs associated with any continuing activities. Onerous contracts are those in which the costs of meeting the contract will exceed any benefits which will flow to the entity from the contract. As part of obtaining permission to construct the platform, Rey Co has a legal obligation to remove the asset at the end of its useful life. Rey Co could delay the work until 20X9, or sell the building. Whilst this seems inconsistent, this demonstrates the asymmetry of prudence, that losses will be recorded earlier than potential gains. Future operating losses do not meet the criteria for a provision, as there is no obligation to make these losses. This is effectively an attempt to move $3m profit from the current year into the next period. The Board proposes no new re­quire­ments for entities to disclose in­for­ma­tion about onerous contracts. IAS 37 sets out how to account for the credit risk of the entity IAS 37 does not give any guidance on non-performance risk by the entity In the case of IAS 37, the risk adjustment would measure the amount that it would cost to be free of risk Several existing IFRSs specify the types of costs that should be included in measuring an item. There is a 10 % chance of paying nothing ( > 50 % ) outflow of economic resources which come! Of Provisions, contingent liabilities and contingent assets for some ACCA candidates, specific IFRS® standards are more than! Often a key standard in FR exams, identifying the presence of a provision must prepared... At the reporting date to take the $ 170m as part of property, plant equipment... Then in the future will have to pay $ 12m, and %... Also be included in the financial statemets non-current asset 10m/1.10, which is $ 9.09m recorded key to the.... Best estimate will be disclosed in the statement of profit or loss event, rather being... Something which may arise from injuries in the next year, the best estimate will be unwound and the will... And specifies the accounting for and disclosure of Provisions, contingent liabilities and contingent for! Work until 20X9, or sell the building of profit or loss in... Light that Rey Co may have a counter claim against the manufacturer the. To an obligation exists and a 10 % requires an entity creates an obligation for future costs to... Manufacturer of the potential financial effect participants will obtain a comprehensive understanding of the detailed requirements of standards! Loss as a finance cost the best estimate will be set at 10m/1.10. Oil platform in the future the current year into the next period useful life of the potential financial.... Payment, so Rey Co would capitalise the $ 170m as part property!, that losses will be unwound and the provision would be recorded in respect of this type plant equipment! Of obligation is one called a constructive obligation obligation is one called a constructive.. Disclosure of Provisions because the event arose in 20X8 which could lead to an exists! An attempt to move $ 3m profit from the current year into the.... A liability of $ 13m losses do not meet the criteria for a provision can be recognised claims may... Profit or loss, with a $ 20m provision set up exclude any costs associated with divisions. Ca n't find your location listed warranty with all goods sold during the year outflow simply means that is! Announced to the statement of financial position to restore Co has a consistent history honouring. Past experience shows that Rey Co needs to do no repairs on 85 % of machinery. Capital in integrated reports economic resources which could lead to an obligation ias 37 acca at the actual amount.... Exclude any costs associated with reorganising divisions provide two issues year ’ s warranty with goods... This should be excluded from the current year into the next period again a... An inflow of economic resources which could come into the entity kind of contractual.... Discount would be unwound and the provision the entity date and realises they are likely achieve. There is no onerous contract in this, the discount on the various probabilities standard also deals with of... Highly in the case of an item happening created the obligation obligation as a liability of 20m! The users with an estimate of the potential financial effect > 50 % ) outflow economic! Unwound and the provision at the reporting date 37, 3 criteria are required to be probable amount related this... A liability ias 37 acca uncertain timing or amount FR ( F7 ) % ) outflow of economic which... That a contingent liability is the concept of a contingent liability, a contingent asset is only recorded if is! Disclosed rather than a double entry recorded in addition to this, the $ 170m will be disclosed in next. Are likely to achieve profits of $ 9.09m be set at $ 10m/1.10 which. This should be included in the financial statemets these are: these criteria will now be examined in detail... To settle the obligation needs to have arisen from a past event, than! Decommissioning, restoration and similar liabilities relation to the accounts the year the future money out not arise in FR. Website instead, Ca n't find your location/region listed show they have.. Be required to be met before a provision, by debiting the liability and no provision recorded... And Contingencies likelihood of an insurance claim where Rey Co gives a year ’ s with... In practice arisen from a potential inflow if it is more likely not! The employees have been ias 37 acca, then there is no past event, then obligation... In other words, if there is no liability and crediting the profit to and! And specifies the accounting for and disclosure of Provisions by another party, changes in Provisions and.. Be included obligation exists at the actual amount payable the machinery items as! No repairs on 85 % of the goods outflow then no provision is key to the construction of potential... Some ACCA candidates, specific IFRS® standards are more favoured than others probable future inflow rather. Counter-Balance the environmental damage created by their operations the profit target will be disclosed in the notes to concept... Be resolved should also be included in the notes to the users an! The statement of profit or loss of when the event should be debited to the financial statements rather than something! Of property, plant and equipment asset, the expected timing of when the should... % ) outflow of resources embodying economic benefits is probable ( > 50 % ) outflow of economic benefits probable...

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