Provisions 1 / 3

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MC Question 4

The following two issues relate to Spiko Co’s mining activities:

Issue 1: Spiko Co began operating a new mine in January 20X3 under a five-year government licence which required Spiko Co to landscape the area after mining ceased at an estimated cost of $100,000.

Issue 2: During 20X4, Spiko Co’s mining activities caused environmental pollution on an adjoining piece of government land.

There is no legislation which requires Spiko Co to rectify this damage, however, Spiko Co does have a published environmental policy which includes assurances that it will do so.

The estimated cost of the rectification is $1,000,000.

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following statements is correct in respect of Spiko Co’s financial statements for the year ended 31 December 20X4?

A     A provision is required for the cost of both issues 1 and 2
B     Both issues 1 and 2 require disclosure only
C     A provision is required for the cost of issue 1 but issue 2 requires disclosure only
D     Issue 1 requires disclosure only and issue 2 should be ignored

Reveal answer
Specimen
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MC Question 5

On 1 October 20X4, Kalatra Co commenced drilling for oil from an undersea oilfield.

Kalatra Co is required to dismantle the drilling equipment at the end of its five-year licence.

This has an estimated cost of $30m on 30 September 20X9.

Kalatra Co’s cost of capital is 8% per annum and $1 in five years’ time has a present value of 68 cents.

What is the provision which Kalatra Co would report in its statement of financial position as at 30 September 20X5 in respect of its oil operations?

A     $32,400,000
B     $22,032,000
C     $20,400,000
D     $1,632,000

Reveal answer
Specimen
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MC Question 6

When a single entity makes purchases or sales in a foreign currency, it will be necessary to translate the transactions into its functional currency before the transactions can be included in its financial records.

In accordance with IAS® 21 The Effect of Changes in Foreign Currency Exchange Rates, which of the following foreign currency exchange rates may be used to translate the foreign currency purchases and sales?

(1)

The rate which existed on the day that the purchase or sale took place

(2)

The rate which existed at the beginning of the accounting period

(3)

An average rate for the year, provided there have been no significant fluctuations throughout the year

(4)

The rate which existed at the end of the accounting period

A     2 and 4
B     1 only
C     3 only
D     1 and 3

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MC Question 16

In a review of its provisions for the year ended 31 March 2015, Cumla’s assistant accountant has suggested the
following accounting treatments:

(i)

Making a provision for a constructive obligation of $400,000; this being the sales value of goods expected to be returned by retail customers after the year end under the company’s advertised 30-day returns policy

(ii)

Based on past experience, a $200,000 provision for unforeseen liabilities arising after the year end

(iii)

The partial reversal (as a credit to the statement of profit or loss) of the accumulated depreciation provision on an item of plant because the estimate of its remaining useful life has been increased by three years

(iiii)

Providing $1 million for deferred tax at 25% relating to a $4 million revaluation of property during March 2015 even though Cumla has no intention of selling the property in the near future

Which of the above suggested treatments of provisions is/are permitted by IFRS?

A     (i) only
B     (i) and (ii)
C     (ii) and (iii)
D     (iv)

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MC Question 5

Tynan’s year end is 30 September 2014 and the following potential liabilities have been identified:

(i)

The signing of a non-cancellable contract in September 2014 to supply goods in the following year on which, due to a pricing error, a loss will be made

(ii)

The cost of a reorganisation which was approved by the board in August 2014 but has not yet been implemented, communicated to interested parties or announced publicly

(iii)

An amount of deferred tax relating to the gain on the revaluation of a property during the current year. Tynan has no intention of selling the property in the foreseeable future

(iv)

The balance on the warranty provision which relates to products for which there are no outstanding claims and whose warranties had expired by 30 September 2014

Which of the above should Tynan recognise as liabilities as at 30 September 2014?

A     All four
B     (i) and (ii) only
C     (i) and (iii) only
D     (iii) and (iv) only

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MC Question 17

On 1 October 2013, Xplorer commenced drilling for oil from an undersea oilfield.

The extraction of oil causes damage to the seabed which has a restorative cost (ignore discounting) of $10,000 per million barrels of oil extracted.

Xplorer extracted 250 million barrels of oil in the year ended 30 September 2014.

Xplorer is also required to dismantle the drilling equipment at the end of its five-year licence.

This has an estimated cost of $30 million on 30 September 2018.

Xplorer’s cost of capital is 8% per annum and $1 has a present value of 68 cents in five years’ time.

What is the total provision (extraction plus dismantling) which Xplorer would report in its statement of financial position as at 30 September 2014 in respect of its oil operations?

A     $34,900,000
B     $24,532,000
C     $22,900,000
D     $4,132,000

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