IAS 37 + IFRIC 1 by KA

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A company has a known policy of cleaning up any environmental contamination caused by its operations, but is not legally obliged to do so. It has recently started new operations causing more environmental contamination. Select the correct statement:

• Recognise provision because there is legal obligation to do so

• Recognise provision because there is constructive obligation to do so

• Provision shall not be recognised

A company is leasing an office building for which it has no further use. However, it is tied into the lease for another year. Select the correct statement:

• Recognise provision because there is legal obligation to do so

• Recognise provision because there is constructive obligation to do so

• Provision shall not be recognised

A company is closing down a division. The board has prepared detailed closure plans which have been communicated to customers and employees. Select the correct statement:

• Recognise provision because there is legal obligation to do so

• Recognise provision because there is constructive obligation to do so

• Provision shall not be recognised

A company has acquired a machine which requires a major overhaul every three years. The cost of the first overhaul is reliably estimated at Rs. 120,000. Select the correct statement:

• Recognise provision because there is legal obligation to do so

• Recognise provision because there is constructive obligation to do so

• Provision shall not be recognised

During the year, Squid Games Limited (SGL) acquired an iron ore mine at a cost of Rs. 6 million. In addition, when all the ore has been extracted (estimated ten years' time) SGL will face estimated costs for landscaping the area affected by the mining that have a present value of Rs. 2 million. These costs would still have to be incurred even if no further ore was extracted. How should this Rs. 2 million future cost be recognised in the financial statements [2 marks]?

• Provision Rs. 2 million and Rs. 2 million capitalised as part of cost of mine

• Provision Rs. 2 million and Rs. 2 million charged to operating costs

• Accrual Rs. 200,000 per annum for next ten years

• Should not be recognised as no cost has yet arisen

Based on past experience, a Rs. 4 million provision for unforeseen liabilities arising after the year end. The treatment is:

• Correct

• Incorrect

The signing of a non-cancellable contract in September 20X4 to supply goods in the following year on which, due to a pricing error, a loss will be made.

• A provision should NOT be recognised as this is future operating loss

• A provision should be recognised as this is onerous contract

A restructuring provision must include the estimated costs of retraining or relocating continuing staff.

• True

• False