WorksheetsIFRS - Are we good to go - IAS 37 - W5
Total questions: 10
Worksheet time: 19mins
Which statements are TRUE?
A contingent liability generally is not recognised in the statement of financial position
A contingent asset is recognised in the statement of financial position as soon as realisation becomes probable
There are certain disclosure exemptions for entities whose debt or equity securities are not listed / in the process of listing
A constructive obligation is a contingent liability until it becomes a legal obligation
(i) A restructuring provision can be recognised once management has made a firm decision to proceed
(ii) An onerous contract provision is recognised based on the least net cost to complete or exit the contract
(iii) The costs provided for can be internal or external, but must be incremental
(iv) Provisions are remeasured at least every second year
Which statements are TRUE?
(i) and (ii)
(i) and (iii)
(ii) and (iii)
(iii) and (iv)
Which statements are FALSE?
A provision is measured based on the best estimate of the amount required to settle the obligation
When there is a range of equally likely estimates, an entity provides the lowest amount in the range
When there is a large population, the provision is based on probability-weighted outcomes
A provision is measured at its present value
(i) An entity makes an accounting policy choice whether to recognise executory contracts in the statement of financial position
(ii) A present obligation may be recognised even if there is uncertainty as to whether the obligation exists
(iii) There is no definition of probable, but most entities use a working definition of “more likely than not”
(iv) There is a present obligation when it is more likely than not that a present obligation exists
Which statements are TRUE?
(i) and (ii)
(iii) and (iv)
(i) and (iii)
(ii) and (iv)
During the year A Co., Ltd acquired an iron ore mine at a cost of $6 million. In addition, when all the ore has been extracted (estimated ten years' time) the company will face estimated costs for landscaping the area affected by the mining that have a present value of $2 million. These costs would still have to be incurred even if no further ore was extracted.
How should this $2 million future cost be recognised in the financial statements?
Provision $2 million and $2 million capitalised as part of cost of mine
Provision $2 million and $2 million charged to operating costs
Accrual $200,000 per annum for next ten years
Should not be recognised as no cost has yet arisen
B Company sells a line of goods under a six-month warranty. Any defect arising during that period is repaired free of charge. B Company has calculated that:
- if all the goods sold in the last six months of the year required repairs the cost would be $3 million.
- If all of these goods had more serious faults and had to be replaced the cost would be $8 million.
The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have to be replaced.
What is the amount of the provision required?
$2 million
$0.85 million
$6 million
$0.6 million
Which one of the following would not be valid grounds for a provision?
A company has a policy has a policy of cleaning up any environmental contamination caused by its operations, but is not legally obliged to do so.
A company is leasing an office building for which it has no further use. However, it is tied into the lease for another year.
A company is closing down a division. The Board has prepared detailed closure plans which have been communicated to customers and employees.
A company has acquired a machine which requires a major overhaul every three years. The cost of the first overhaul is reliably estimated at $120,000.
D is being sued by a customer for $2 million for breach of contract over a cancelled order. D has obtained legal opinion that there is a 20% chance that Dwill lose the case. Accordingly D has provided $400,000 ($2 million × 20%) in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the case will not go to court until next year.What is the amount of the provision that should be made by D in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets ?
$2,000,000
$2,100,000
$500,000
$100,000
T Company year end is 30 September 20X4 and the following potential liabilities have been identified:
(i) 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.
(ii) The cost of a reorganisation which was approved by the board in August 20X4 but has not yet been implemented, communicated to interested parties or announced publicly
(iii) An amount of deferred tax relating to the gain on the revaluation of a property during the current year. T Company has no intention of selling the property in the foreseeable future.
(iv) The balance on the warranty provision which related to products for which there are no outstanding claims and whose warranties had expired by 30 September 20X4.
Which TWO of the above should T Company recognise as liabilities as at 30 September 20X4?
(i) and (ii)
(iii) and (iv)
(i) and (iii)
(ii) and (iv)
In five years' time C Co., Ltd will have to dismantle its factory and return the site to the local authority. A provision was set up for the present value of the dismantling costs when the factory was first acquired. The opening balance on the provision at 1 January 2021 was $2.63 million. C Co., Ltd has a cost of capital of 8%.
What is the amount of the provision that should be carried forward at 31 December 2022 for the dismantling of the factory?
$2,630,000
$3,067,632
$2,435,185
$2,840,400
