Syllabus C. Reporting The Financial Performance Of A Range Of Entities C7. Provisions, Contingencies and Events after the reporting date

C7a. Some typical examples 2 / 3

Syllabus C7a)

Discuss and apply the recognition, de-recognition and measurement of provisions, contingent liabilities and contingent assets including environmental provisions and restructuring provisions.

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

Circumstance Provide?
Assurance Warranties/guarantees  Accrue a provision (past event was the sale of defective goods) 
Customer refunds Accrue if the established policy is to give refunds 
Onerous (loss-making) contract  Accrue a provision 
Land contamination  Accrue a provision if the company's policy is to clean up even if there is no legal requirement to do so 
Future operating losses  No provision (no present obligation) 
Firm offers staff training  No provision (there is no obligation to provide the training) 
Major overhaul or repairs  No provision (no obligation) 
Restructuring by sale of an operation/line of business  Accrue a provision only after a binding sale agreement 
Restructuring by closure of business locations or reorganisation  Accrue a provision only after a detailed formal plan is adopted and announced publicly. A Board decision is not enough