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ACCA FR知识点：Other issues within provisions

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发布时间：2021-09-16 10:50

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Other issues within provisions

1.The time value of money

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.Subsequently,the discount on this provision would be unwound over time,to record the provision at the actual amount payable.The unwinding of this discount would be recorded in the statement of profit or loss as a finance cost.

EXAMPLE

At 31 December 20X8,the legal advisors of Rey Co now believe that the$10m payment from the court case would be payable in one year.Rey Co has a cost of capital of 10%.

On 31 December 20X8,Rey Co should record the provision at$10m/1.10,which is$9.09m.This should be debited to the statement of profit or loss,with a liability of$9.09m recorded.

By 31 December 20X9,when Rey Co is required to make the payment,the liability should be showing at$10m,not$9.09m.Therefore,the liability is increased by 10%over the year,giving an increase of$910k which would be recorded in finance costs.

2.Restructuring costs

Restructuring costs associated with reorganising divisions provide two issues.The first is to assess whether an obligation exists at the reporting date.The key here is whether the restructuring has been announced to the affected employees.If the employees have been informed,then an obligation exists and a provision must be made.If the employees have not been informed,then the company could change its mind.In this case,there is no present obligation to incur the costs associated with this.

The second issue for consideration is which costs should be included within the provision.These costs should exclude any costs associated with any continuing activities.Therefore,any provision should only include items such as redundancy costs and closure costs.Ongoing costs such as the costs of relocating staff should be excluded from the provision and should instead be expensed as they are incurred.

3.Onerous contracts

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 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.

4.Decommissioning costs associated with assets

So far,all 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 exception to this is if an entity creates an obligation for future costs due to the construction of a non-current asset.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.

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Rey Co constructed an oil platform in the sea on 1 January 20X8 at a cost of$150m.As part of obtaining permission to construct the platform,Rey Co has a legal obligation to remove the asset at the end of its 25-year useful life.This obligation has a present value of$20m.

Here,Rey Co would capitalise the$170m as part of property,plant and equipment.As only$150m has been paid,this amount would be credited to cash,with a$20m provision set up.Over the useful life of the asset,the$170m will be depreciated.In addition to this,the discount on the provision will be unwound and debited to finance costs.Consequently,the provision will increase each year until it becomes$20m at the end of the asset’s 25-year useful life.

5.Future operating losses

Future operating losses do not meet the criteria for a provision,as there is no obligation to make these losses.Therefore,they cannot be included in the financial statements.

Summary

In summary,IAS 37 is a key standard for FR candidates.Candidates are required to learn the three key criteria for a provision,as they are likely to have to explain these in an exam.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.If candidates are able to do this,then provisions can be an area where they can score highly in the FR exam.

Written by a member of the Financial Reporting examining team