ACCA AAA ^INT Syllabus D. Audit of Historical Financial Information - Some typical examples - Notes ^{9 / 41}

Specific types of provision

• Future operating losses

  Provisions are not recognised for future operating losses (no obligation)

• Onerous contracts

  Recognised and measured as a provision (as there is a contract and so a legal obligation)

• Restructuring

Restructuring - Create a provision when:

1. There is a detailed formal plan for the restructuring; and

2. There is a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it (this creates a constructive obligation)

Provide only for costs that are:

• (a) necessarily entailed by the restructuring; and 
  (b) not associated with the ongoing activities of the entity

Possible Exam Scenarios

• Assurance Warranties

  Yes there is a legal obligation so provide. The amount is based on the class as a whole rather than individual claims. Use expected values

• Major Repairs

  These are not provided for. Instead they are treated as replacement non current assets. See that chapter

• Self Insurance

  This is trying to provide for potential future fires etc. Clearly no provision as no obligation to pay until fire actually occurs

• Environmental Contamination Clearance

  Yes provide if legally required to do so or other parties would expect the company to do so as it is its known policy

• Decommissioning Costs

  All costs are provided for. The debit would be to the asset itself rather than the income statement

• Restructuring

  Provide if there is a detailed formal plan and all parties affected expect it to happen. Only include costs necessary caused by it and nothing to do with the normal ongoing activities of the company (e.g. don’t provide for training, marketing etc)

• Reimbursements

  This is when some or all of the costs will be paid for by a different party.

  This asset can only be recognised if the reimbursement is virtually certain, and the expense can still be shown separately in the income statement