Additional Question - IAS 37

Additional Question – IAS 37
Question 1: Provision
A company spills chemical into Russia land causing damage that will cost $7m to clean.
There is no environmental legal legislation, but the company has a Green policy on its
website.
Required: Can the company make provision the clean-up cost?
Question 2: Contingent Asset and liability

A Newspaper claims a public figure is a mafia even though it knows this is not true. The
public figure sues, and both set of lawyers assume that the public figure will win the
case and receive damages in the order of $1m. There is no possibility of the case being
resolved before the financial statements are prepared.
Required: Describe how the above case will be represented in the financial statement
of both entities.
Question 3: – Contingent asset

Eddie Limited has a reporting date of 31 December and inventory worth $100,000 was
stolen just prior to the reporting date. Eddie Limited has made a claim on its insurance
and has heard from the insurers who have said that it is probable that the full amount
will be reimbursed, but no further confirmation of when any payment will be made has
been received.
Required: Advised how would the transaction be accounted for in the financial
Statements
Question 4: - Best estimate

Eunice Corporation, (Eunice Co .) has a published environmental policy. In this, Eunice
Co explains that they always replant trees to counterbalance the environmental damage
created by their operations. Eunice Co has a consistent history of honouring this policy.
During 20X8, Eunice Co opened a new factory, leading to some environmental damage.
Eunice Co estimates that the associated tree planting and environmental clear up costs
will be $400,000.
Required: Should the company provide for this? If yes, how should it be presented in
the Financial Statements?
Question 5: - Best Estimate

Amelia, an employee of Gbato Corporation (Gbato Co.) was injured at work in 2017 due
to faulty equipment and is suing Gbato Co. Gbato Co’s lawyers have advised that it is
probable that the entity will be found liable. Gbato Co would have to provide for the best
estimate of any damages payable to Amelia.
Required: Should the company provide for this?
This is because the event arose in 2017 and, based on the evidence available, there
is a present obligation.
Question 5b: - Best Estimate

Gbato Co. has received legal advice that the most likely outcome of the court case from
the employee is that they will lose the case and have to pay $10m. The legal team think
there is an 80% chance of this. They believe there is a 10% chance of having to pay
$12m, and a 10% chance of paying nothing.
Required: Should the company provide for this? If yes show how the above case will be
represented in the financial statements.
Question 6: Contingent Liability

How should a contingent liability be included in a company financial statement if the
likelihood of the transfer of economic benefits to settle it is remote?
a. No disclosure or provision is required

b. Disclosed by notes with no provision being made.
Question 7: Provision & Contingencies

The following statement have to be considered in finalising the financial statements of
Felix & Company, a limited liability company:
1. The company give warranties on its products, the company statistics show that
about 6% of sale give rise to warranties claim.
2. The company has guaranteed the overdraft of another company. The likelihood of
a lability arising under the guarantee is possible.
How would the above transaction be treated in the financial statement?
1. A. Create Provision B. Disclosed in notes only C. No action

2. A. Create Provision B. Disclosed in notes only C. No action
Question 8: Provision
Albertina makes hair shampoo and has suffered some bad publicity as a result of a
Andrew, customer claiming to have lost his hair due to Albertina shampoo usage.
Therefore, Andrew launched a court action in 2020 claiming damages of $ 5,000.
Albertina lawyer had advised her that the most probable outcome is that the business
will have to pay the customer $ 3000.
Required: What amount should be included in Albertina’s financial statement as

provision for the year ended December 31, 2020.
Question 9:
Albertina limited has been taken to court by a customer who had an accident in her
building on July 30, 2022. The customer says that the accident was the fault of June
limited and is claiming a damages of $ 100,000. The lawyers has advised that the
chance of June losing the case and having to pay damages is 60%. Meanwhile, the
lawyers’ fees are estimated as $ 10,000.
Required: What is the amount of provision that should be included the financial
statements of Albertina Ltd for the year ended 30 June 2022.
Question 10: Discounted value

Yarkpasuo Ltd prepare financial statement 31 December each year. On 31 December
2018, the legal advisors of Yarkpasuo Ltd now believe that the $10m payment from the
court case would be payable in one year (31 December 2019). Yarkpasuo Ltd has a cost
of capital of 10%.
Required: Show how the above case will be represented in the financial statement for
the year ended 2018 and 2019 respectively.
Question 11: Discounted value

Abass Consults constructed an oil platform in the sea on 1 January 2018 at a cost of
$150m. As part of obtaining permission to construct the platform, Abass Consults has a
legal obligation to remove the asset at the end of its 25-year useful life. This obligation
has a present value of $20m.
Required: Show how the above case will be represented in the financial statement for
the year ended 2018.
Suggested solution:
Here, Abass Consults would capitalise the $170m as part of property, plant and
equipment. As only $150m has been paid, this amount would be credited to cash, with
a $20m provision set up. Over the useful life of the asset, the $170m will be
depreciated. In addition to this, the discount on the provision will be unwound and
debited to finance costs. Consequently, the provision will increase each year until it
becomes $20m at the end of the asset’s 25-year useful life.
Question 12: Asset related provision

An item of PPE was acquired at a cost of $100m on 1 January 20X1, with a useful life of
ten years. As part of local legislation, the PPE must be decommissioned the equipment
at the end of the ten-year useful life. The current estimate decommissioning the PPE in
ten years' time is $10m. A cost of capital of 10% per annum is to be used to discount the
$10m to present value. The present value of $1 receivable in ten years' time at a
discount rate of 10% per annum is $0.386.
Required: Show the accounting treatment of both the PPE and the provision at the end
of the reporting period, 31 December 20X1.
Suggested solution is as follows:

PPE
Initial cost = $110m ($100m + $10m)

Depreciation = $11m per annum ($110/10 years), to be recognised through profit or loss
(SPL)
Carrying value = $99m ($110m - $11m), to be recognised on the statement of financial
position (SFP) Provision Initial recognition (1 Jan 20X1) at present value = $3.86m (£10m
x 0.386) Finance cost = $0.386 ($3.86m x 10%), to be recognised through profit or loss
(SPL) Provision at the reporting date (31 December 20X1) = $4.246m ($3.86m +
$0.386m), to be recognised on the statement of financial position

Additional Question - IAS 37

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Additional Question – IAS 37

Required: Can the company make provision the clean-up cost?

Question 2: Contingent Asset and liability

Question 3: – Contingent asset

Question 4: - Best estimate

Question 5: - Best Estimate

Question 5b: - Best Estimate

Question 6: Contingent Liability

a. No disclosure or provision is required

Question 7: Provision & Contingencies

How would the above transaction be treated in the financial statement?

1. A. Create Provision B. Disclosed in notes only C. No action

Required: What amount should be included in Albertina’s financial statement as

Question 10: Discounted value

Question 11: Discounted value

Question 12: Asset related provision

Suggested solution is as follows:

Initial cost = $110m ($100m + $10m)

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