FIN611 Assignment no 1 solution

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IAS 37

 Defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets.

Provisions

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognizes a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.

IAS 37 elaborates on the application of the recognition and measurement requirements for three specific cases:

• future operating losses—a provision cannot be recognized because there is no obligation at the end of the reporting period;
• an onerous contract gives rise to a provision; and
• A provision for restructuring costs is recognized only when the entity has a constructive obligation because the main features of the detailed restructuring plan have been announced to those affected by it.

As for above cited definition of IAS 37 it is clarified that IAS 37 states that there should be an obligation to pay (whether constructive or legal) only then you can create provision. Here in this situation company don’t have obligation to replace the assets, it can just close the company before 10 years.

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