TOPIC 01 IAS37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS(二).doc

II. Specific application1. Future operating lossesIn the past, provisions were recognized for future operating losses on the grounds of prudence. However these should not be provided for the following reasons.They relate to future events;There is no obligation to a third party. The loss-making business could be closed and the losses avoided.2. Onerous contractsAn onerous contract is a contract in which the unavoidable costs of meeting the contract exceed the economic benefits expected to be received under it.A common example of an onerous contract is a lease on a surplus factory. The leaseholder is legally obliged to carry on paying the rent on the factory, but they will not get any benefit from using the factory.The least net cost of an onerous contract should be recognized as a provision. The least net cost is the lower of the cost of fulfilling the contract or of terminating it and suffering any penalty payments.Some assets may have been bought specifically for the onerous contract. These should be reviewed for impairment before any separate provision is made for the contract itself.1DemoDroopers has recently bought all of the trade, assets and liabilities of Dolittle, an unincorporatd business. As part of the take-over all of the combined businesss activities have been relocated at Droopers main site. As a result Dolittles premises are now empty and surplus to requirements.However, just before the acquisition Dolittle had signed a three year lease for their premises at $6000 per calendar month. At 31 December 2003 this lease ad 32 months left to run and the landlord had refused to terminate the lease. A sub-tenant had taken over part of the premises for the rest of the lease at a rent of $2500 per calendar month.Required（a） Should Droopers recognized a provision for an onerous contract in respect of this lease?（b） Show how this information will be presented in the financial statements for 2003 and 2004. Ignore the time value of money.答疑编号10010201：针对该题提问Solution:Droopers has a legal obligation to pay a further $192000 to the landlord, as a result of a lease signed before the year end. Therefore an onerous contract exists and must be provided for.There is also an amount recoverable form the sub-tenant of $80000（322500）. This will be shown separately in the balance sheet as an asset.The $192000 payable and the $80000 recoverable can be netted off in the income statement.income statements20032004$provision for onerous lease contract（net）112000 Dr.-net rental payable on lease （72-30）-42000 Drrelease of provision42000 Cr112000 Dr.-balance sheetsreceivalbes amounts recoverable from sub-tenants80000 Dr.50000 Drliabilitiesamounts payable on onerous contracts192000 Cr120000 Cr3. RestructuringA restructuring is a programme that is planned and controlled by management and has a material effect on:The scope of a business undertaken by the reporting entity in terms of the products or services it provides; orThe manner in which a business undertaken by the reporting entity is conducted;Restructuring includes terminating a line of business, closure of business locations, changes in management structure, and refocusing a businesss operations.Restructuring provisions have always been quite common, and have often been misused. IAS37 restricts the recognition of restructuring provisions to situations where an entity has a constructive obligation to restructure.A constructive obligation will only arise if:There is a detailed formal plan for restructuring. This must identify the businesses, locations and employees affected; andThose affected have a valid expectation that the restructuring will be carried out. This can be by starting to implement the plan or by announcing it to those affected.The constructive obligation must exist at the year-end. （Any obligation arising after the year end may require disclosure under IAS10）A board decision alone will not create a constructive obligation unless:The plan is already being implemented. For example, assets are being sold, redundancy negotiations have begun; orThe plan has been announced to those affected by it. The plan must have a strict timeframe without unreasonable delays; orThe Board itself contains representatives of employees or other groups affected by the decision. （This is common in mainland Europe.）An announcement to sell an operation will not create a constructive obligation. An obligation will only arise when a purchaser is found and there is a binding sale agreement.A restructuring provision should only include the direct costs of restructuring. These must be both:（a） Necessarily entailed by the restructuring; and（b） Not associated with the ongoing activities of the entity;The following costs must not be provided for because they relate to future events:（a） Retaining or relocating staff;（b） Marketing;（c） Investment in new systems and distribution networks;（d） Future operating losses （unless arising from an onerous contract）（e） Profits on disposal of assets.2DemoOn 15 January 2005 the Board of Directors of Shane voted to proceed with two reorganization schemes. Shanes financial year end is 31 March, and the financial statements will be finalized and published on 30 June.Scheme 1The closure costs will amount to $125000. The factory is rented on a shortterm lease, and there will be no gains or losses arising on this property. The closure will be announced in June, and will commence in August.Scheme 2The costs will amount to $45000 （after crediting $105000 profit on disposal of certain machines）. The closure will take place in July, but redundancy negotiations began with the staff in March.RequiredExplain and calculate the year-end restructuring provision答疑编号10010202：针对该题提问Solution:Scheme 1 The obligation arises in June, after the year end, and so there will be no provision. However, the announcement in June should be disclosed as an event after the balance sheet.Scheme 2 Although the closure will not begin until July, the employees will have had a valid expectation that it would happen when the redundancy negotiations began in March. Therefore a provision should be recognized. The provision will be for $150000 because the expected profit on disposal cannot be netted off against the expected costs.4. Environmental provisionsThese are often referred to as clean-up costs because they usually relate to the cost of decontaminating and restoring an industrial site when production has ceased. Merely causing damage or intending to clean-up a site will not create an obligation. Generally, a provision will only be recognized if there is a legal obligation to repair environmental damage. However, some entities publish specific corporate guidelines that include environmental awareness. If these guidelines create a constructive obligation to clean-up then a provision will be required.The full cost of an environmental provision should be recognized as soon as the obligation arises. Because it may be many years before the costs relating to the provision are incurred the provision is normally recognized at its present value. As the day of payment draws nearer, the discount unwinds and the provision increase. The increase in the provision will be charged to the income statement as a finance cost.It is common for modern extraction licenses to include an obligation to clean-up when the license expires. In these situations, the present value of the clean-up costs are treated as part of the cost of the license.3DemoOn 1 January 2006 scrubber paid the Government of Metallica $5m for a three year license to quarry gravel. At the end of the license Scrubber must restore the quarry to its natural state. This will cost a further $3m. These costs will be incurred on 1 January 2009. Scrubbers cost of capital is 10%.RequiredPrepare all relevant extracts from Scrubbers financial statements for 2006 to 2009.答疑编号10010203：针对该题提问Solutionincome statement2006200720082009$000$000$000$000operating costsdepn241824182417-clean-up-3000release of provision-3000finance costsunwinding of discnt225249273-balance sheet$000$000$000$000non-current assetslicense: cost725372537253-depn-2418-4836-7253-nbv48352417-liabilitiesclean-up provision247827273000-5. Contingent liabilities and contingent assets（1） Contingent assetsA contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.An example of a contingent asset is a legal claim being made by an entity. If the claim is successful, then the entity will receive compensation. However, the outcome is uncertain and not within the control of the entity.A contingent asst should not be recognized. It may be disclosed if the future inflow of economic benefits is probable.If the future in