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Sale of Operation (Binding Sale Agreement) B. Closure or Reorganization

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(a) A restructuring provision must be recognized if a detailed formal plan is adopted and announced, a present obligation has arisen from a past event, an outflow of resources is probable, and the amount can be reliably estimated. Direct costs of restructuring are provided for but not costs like retraining staff. (b) Provisions include amounts for warranties, environmental damages, guarantees, onerous contracts, restructuring costs, lawsuits if probable and estimable, and customer refunds if a valid expectation exists. (c) Trade and other payables represent present obligations from past purchases or exchanges, measured initially at transaction price or present value and subsequently at amortized cost usually. They include accounts

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Sale of Operation (Binding Sale Agreement) B. Closure or Reorganization

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kim
93 views3 pages
(a) A restructuring provision must be recognized if a detailed formal plan is adopted and announced, a present obligation has arisen from a past event, an outflow of resources is probable, and the amount can be reliably estimated. Direct costs of restructuring are provided for but not costs like retraining staff. (b) Provisions include amounts for warranties, environmental damages, guarantees, onerous contracts, restructuring costs, lawsuits if probable and estimable, and customer refunds if a valid expectation exists. (c) Trade and other payables represent present obligations from past purchases or exchanges, measured initially at transaction price or present value and subsequently at amortized cost usually. They include accounts

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provision

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Provision

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(a) A restructuring provision must be recognized if a detailed formal plan is adopted and announced, a present obligation has arisen from a past event, an outflow of resources is probable, and the amount can be reliably estimated. Direct costs of restructuring are provided for but not costs like retraining staff. (b) Provisions include amounts for warranties, environmental damages, guarantees, onerous contracts, restructuring costs, lawsuits if probable and estimable, and customer refunds if a valid expectation exists. (c) Trade and other payables represent present obligations from past purchases or exchanges, measured initially at transaction price or present value and subsequently at amortized cost usually. They include accounts

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93 views3 pages

Sale of Operation (Binding Sale Agreement) B. Closure or Reorganization

Uploaded by

kim
(a) A restructuring provision must be recognized if a detailed formal plan is adopted and announced, a present obligation has arisen from a past event, an outflow of resources is probable, and the amount can be reliably estimated. Direct costs of restructuring are provided for but not costs like retraining staff. (b) Provisions include amounts for warranties, environmental damages, guarantees, onerous contracts, restructuring costs, lawsuits if probable and estimable, and customer refunds if a valid expectation exists. (c) Trade and other payables represent present obligations from past purchases or exchanges, measured initially at transaction price or present value and subsequently at amortized cost usually. They include accounts

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Transactions Recognize on or before Recognize after the end

the end reporting period reporting period


A. Sale of operation  Accrue provision  No provision recognized.
(binding sale
agreement)
B. Closure or  Accrue only if a detailed  If a detailed plan is adopted
reorganization plan is adopted and after end of reporting date
announced publicly on or no provision shall be
before reporting date. recognized.
C. Restructuring  Accrue provision only if announced at acquisition and a
provision on detailed plan is adopted within a short period after
acquisition (merger) acquisition.
D. Future operating  Provisions are not recognized for future operating losses.
losses

An entity must recognize a restructuring provision if, and only if:

(a) a present obligation has arisen as a result of a past event


(b) (b) an outflow of economic benefit to settle the obligation is probable
(“more likely than not”)
(c) the amount of the obligation can be estimated reliably.
(d) Detailed formal plan for the restructuring is adopted.
(e) The plan is announced to those affected by it.

Restructuring provisions are measured

A restructuring includes only includes direct cost entailed with


restructuring and excludes the following cost:

1. Retraining or relocating continuing staff


2. Marketing
3. Investment in new systems and distribution networks.

 Restructuring is a program that is planned and controlled by the


management, and materially changes either:
a) The scope of a business undertaken by an entity
b) The manner in which the business is conducted.

Causes of restructuring includes:


a) Sale or termination of a line of business.
b) Closure of business activities from another country or region to another
c) Changes in measurement structure
d) Fundamental reorganizations that have a material effect on the nature
and focus of the entity’s operations.
Components of provisions includes:

1) Warranties – The entity provides for the estimated liability to repair or replace products
under warranty at the time the revenue is recognized.
2) Environmental damages – An obligating event where the entity has broken current
environmental legislation or environmental policy.
3) Guarantees – A commitment to honor an obligation of another party in the event
certain defined conditions are not met.
4) Onerous contracts – Contracts in which the unavoidable cost of meeting the
obligation under the contract exceed the economic benefits expected to be received.
5) Restructuring cost – Liabilities for expenses already incurred but not yet paid.
6) Court case or pending lawsuits – It can only be recognized as provision if there is
present obligation and outflow is both probable and estimable.
7) Obligations caused by an entity’s policy to make refunds to customers – Present
obligation arises from injury caused to customer provision is recognized if an outflow
is both probable and estimable.

Accounting procedures for Provisions are the ff:

1) Refinancing agreement – replacement of an existing debts with a new one with


a different term (loan payable and interest payable).
2) Bank Reconciliation – Prepared by the management to bring the bank’s
recording into agreement with the depositor’s recording.
3) Credit Memorandum – Part of bank reconciliation which is given for a loan
approved by the bank.
Dr. Cash in Bank xxx
Interest expense xxx
Cr. Notes payable xxx
To record bank loan discounted at 18% for 60 days.
4) Voucher system – A system that uses special journals for payment using vouchers
to discourage fraud and manipulation of accounts.
Dr. Purchases xxx
Cr. Vouchers payable xxx
To record purchase of inventory through voucher.
 Liabilities represents amounts an entity owes for its debts or
obligations. It is a present obligation of the entity to transfer an
economic resource as a result of past events

An obligation is either:

a. Legal Obligation – Obligation result from a contract or operation of law


b. Constructive Obligation – It results from an entity’s action or past
practice that created a valid expectation for responsibilities.

 Trade and other payables are obligation arising from purchases of


inventory that are to be sold in the ordinary course of business even if
they are not due for settlement within the end of the reporting date.

To recognize Trade and other payables like any liabilities it must have the ff:

I. The trade & other payable is the present obligation of a particular entity
(not necessary the payee whom the obligation owed be identified)
II. The obligation arises from past event
III. The settlement of the liability requires an outflow of resources
embodying economic benefits.

Trade and other payables are initially measured

 At amounts established in exchanges (amount to be paid or amount


discounted) or present value.

Trade and other payables are subsequently measured

 At amortized cost but for some is reported at face amount.

Trade and other payables composed of the ff:

1) Accounts payable – Obligation not supported by formal promises to pay by the debtor.
2) Notes payable – Obligation supported by promissory notes by the debtor.
- Non-Interest-bearing note (note is initially measured based on the prevailing
market rate of interest for a similar obligation)
- Interest bearing note
3) Dividends payable – Amount owed by a corporation to its shareholders as a result
of the board of directors’ action on the distribution of corporate earnings.
4) Loan payable – Usually used to connote bank loans.
5) Bonds payable – Obligation issued by the debtor supported by the promises made
under seal.
6) Accrued expenses – Liabilities for expenses already incurred but not yet paid.
7) Others like taxes payable, vouchers and interest payable and the like.

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