Scribd
Upload
197 views2 pages

Solution Tutorial 9 - Provisions CL CA

The document discusses accounting treatments for provisions, contingent liabilities, and contingent assets. It provides solutions to 4 questions that describe scenarios involving potential obligations. The solutions determine if there is a present obligation from a past event, if an outflow is probable, and if a provision should be recognized based on IFRS standards. For example, in question 1 there is a present obligation for 90% of removal costs since the oil rig was constructed, but not yet for extraction costs.

Uploaded by

Aisyah Othman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
197 views2 pages

Solution Tutorial 9 - Provisions CL CA

The document discusses accounting treatments for provisions, contingent liabilities, and contingent assets. It provides solutions to 4 questions that describe scenarios involving potential obligations. The solutions determine if there is a present obligation from a past event, if an outflow is probable, and if a provision should be recognized based on IFRS standards. For example, in question 1 there is a present obligation for 90% of removal costs since the oil rig was constructed, but not yet for extraction costs.

Uploaded by

Aisyah Othman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

ACT3102 / 3123 FINANCIAL ACCOUNTING AND REPORTING 2

SOLUTIONS TUTORIAL
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

Question 1
An entity operates an offshore oilfield where its licensing agreement requires it to remove the
oil rig at the end of production and restore the seabed. Ninety per cent of the eventual costs
relate to the removal of the oil rig and restoration of damage caused by building it, and 10
per cent arise through the extraction of oil. At the end of the reporting period, the rig has
been constructed but no oil has been extracted.

Required:
Explain the accounting treatment that shall be accorded to the above case.

Solutions
Present obligation as a result of a past obligating event – The construction of the oil rig creates
a legal obligation under the terms of the licence to remove the rig and restore the seabed and
is thus an obligating event. At the end of the reporting period, however, there is no obligation
to rectify the damage that will be caused by extraction of the oil.
An outflow of resources embodying economic benefits in settlement – Probable.
Conclusion – A provision is recognised for the best estimate of ninety per cent of the eventual
costs that relate to the removal of the oil rig and restoration of damage caused by building it
(see paragraph 14). These costs are included as part of the cost of the oil rig. The 10 per cent
of costs that arise through the extraction of oil are recognised as a liability when the oil is
extracted.

Question 2
A retail store has a policy of refunding purchases by dissatisfied customers, even though it is
under no legal obligation to do so. Its policy of making refunds is generally known.

Required:
Explain the accounting treatment that shall be accorded to the above case.

Solutions
Present obligation as a result of a past obligating event – The obligating event is the sale of
the product, which gives rise to a constructive obligation because the conduct of the store has
created a valid expectation on the part of its customers that the store will refund purchases.
An outflow of resources embodying economic benefits in settlement – Probable, a proportion
of goods are returned for refund (see paragraph 24).
Conclusion – A provision is recognised for the best estimate of the costs of refunds (see
paragraphs 10 (the definition of a constructive obligation), 14, 17 and 24).

Question 3
On 12 December 20X0, the board of an entity decided to close down a division making a
particular product. On 20 December 20X0 a detailed plan for closing down the division was
agreed by the board; letters were sent to customers warning them to seek an alternative
source of supply and redundancy notices were sent to the staff of the division.

Required:
Explain the accounting treatment that shall be accorded to the above case.

Solutions
Present obligation as a result of a past obligating event – The obligating event is the
communication of the decision to the customers and employees, which gives rise to a
constructive obligation from that date, because it creates a valid expectation that the division
will be closed.
An outflow of resources embodying economic benefits in settlement – Probable.
Conclusion – A provision is recognised at 31 December 20X0 for the best estimate of the costs
of closing the division (see paragraphs 14 and 72).

Question 4
During management meeting in November 2021, the management of the company was made
to understand there is a new legislation concerning smoke filters. Under the new legislation,
an entity is required to fit smoke filters to its factories by 30 June 2022. In December 2022
the management of the company realised that the company has not fitted the smoke filters.
The entity will be charge RM200,000 of penalty for not fitting the smoke filter.

Required:
Explain the accounting treatment that shall be accorded to the above case as at 31 December
2021 and 31 December 2022. Please show journal entry if necessary.

Solution
(a) At 31 December 2021, the end of the reporting period
Present obligation as a result of a past obligating event – There is no obligation because there
is no obligating event either for the costs of fitting smoke filters or for fines under the
legislation.
Conclusion – No provision is recognised for the cost of fitting the smoke filters (see paragraphs
14 and 17–19).

(b) At 31 December 2021, the end of the reporting period Present obligation as a result of a
past obligating event – There is still no obligation for the costs of fitting smoke filters because
no obligating event has occurred (the fitting of the filters). However, an obligation might arise
to pay fines or penalties under the legislation because the obligating event has occurred (the
non-compliant operation of the factory).

An outflow of resources embodying economic benefits in settlement – Assessment of


probability of incurring fines and penalties by non-compliant operation depends on the details
of the legislation and the stringency of the enforcement regime.

Conclusion – No provision is recognised for the costs of fitting smoke filters. However, a
provision is recognised for the best estimate of any fines and penalties that are more likely
than not to be imposed (see paragraphs 14 and 17–19).

Recognition of penalty
Dr Penalty expenses 200,000
Cr Provision for penalty 200,000

You might also like