IAS-10 Events after the reporting period

&
IAS-37: Provisions, Contingent Liabilities and Contingent Assets

Md Mashiur Rahaman ACA

IAS-10 Events after the reporting period
Date covered under Events after the reporting period
Dividend & Going concern

Going concern
List of Adjusting Events (para 9):

✓ events that indicate that the going concern assumption in relation

to the whole or part of the entity is not appropriate;
✓ settlements after reporting date of court cases that confirm the
entity had a present obligation at reporting date;
✓ receipt of information after reporting date indicating that an asset
was impaired at reporting date;
✓ bankruptcy of a customer that occurs after reporting date that
confirms a loss existed at reporting date on trade receivables;
✓ sales of inventory after reporting date that give evidence about their
net realisable value at reporting date;
✓ discovery of fraud or errors that show the financial statements are
incorrect.
List of Non-adjusting Events (para 22):

✓ major business combinations or disposal of a major subsidiary;

✓ major purchase or disposal of assets, classification of assets as held for sale or
expropriation of major assets by government;
✓ destruction of a major production plant by fire after reporting date;
✓ announcing a plan to discontinue operations;
✓ announcing a major restructuring after reporting date;
✓ major ordinary share transactions;
✓ abnormally large changes, after the reporting date in asset prices or foreign
exchange rates;
✓ changes in tax rates or tax law;
✓ entering into major commitments such as guarantees;
✓ commencing major litigation arising solely out of events that occurred after the
reporting date.
IAS-37: Provisions, Contingent Liabilities and Contingent Assets

Md Mashiur Rahaman ACA

Agenda

Agenda

Definitions (Provisions, contingencies)

Recognition
Measurement
Provisions,
Onerous contract and
Restructuring
Scope excludes items under other standards

Share-based payments IFRS 2

Business combinations IFRS 3
Insurance contracts IFRS 4
Revenue from contracts with customers IFRS 15
Income taxes IAS 12
Leases IFRS 16
Employee benefits IAS 19
Financial instruments (including guarantees) IFRS 9
Definitions (Provisions and contingencies)

Provision Contingent liability Contingent liability

A liability of uncertain

Past events
Past events
obligation

obligation
timing or amount.

Possible

Present
Liability
obligation
Present

events
Past

Or

recognized
Existence will
be confirmed

because
Is not
Settlement

➢ Outflow is not probable

Occurrence or non ➢ Amount can’t be
occurrence of measured reliably
Outflow from the uncertain future
entity of resources events
Contingent assets

Probable vs Possible
Types of obligations

Legal obligation Constructive obligation

♦ Contract (explicit or implicit Accept responsibilities via:

terms)
♦ Established pattern of past
♦ Legislation practice
♦ Other operation of law ♦ Published policies
♦ Current statement

Create valid expectation

on part of other parties
Recognition of a provision
Opinions of experts

Present obligation as Additional evidence provided by

a result of a past event EATRP (IAS-10)

discharge the obg.

Valid expectations

that the entity will

in other parties
Enforceable by
Evidence of
Present Obligation

law
alternative
&

to settling
realistic

the obg
No
More likely than not to occur
Probable outflow of resources
(> 50%)
&

A range of possible outcomes

Reliable estimate (best)
Sufficiently reliable estimate
Recognition of contingent assets and liabilities-??

Contingent liabilities Contingent assets

♦ Disclose as required by para 86

(No recognition) ♦ Disclose as required by para 89
♦ Disclosure is also not required if (No recognition)
payment is remote ♦ Recognise when virtually
♦ Recognise when becomes certain
probable (reliable estimate can be
done)
Accruals vs Provisions:

♦ Goods or services received but not paid, invoiced or agreed with supplier- Accruals.

♦ Accruals are much less uncertain than provisions.

♦ Reported as part of trade and other payables whereas provisions are separately.
Decision tree- IAS 37
Measurement

Best estimate Risk & uncertainties Reimbursement

Supplemented Cautious ➢ By 3rd party- Separate

expert opinion
Independent
by experience
asset
Management ➢ PnL presentation- net
judgement Discounting basis
Would rationally pay When the effect of Changes in provisions
to settle the obligation
time value of money
➢ Adjust to reflect
Using statistical method is material current best estimate
of estimation (Expected
value) ➢ Reverse- if no longer
Future events
probable
Continuous range of
possible outcome- Mid
Use of provision
▪ New technology
point (sufficient objective ➢ For which provisions
Single obligation- Most evidence)
created
likely outcome ▪ New legislation
➢ Reverse- if no longer
required
A question for you: Measurement

♦Assume that after a natural disaster, Entity A recognises a CU1 million provision for
its obligation for environmental rehabilitation, which it will undertake itself. Entity
A’s insurance policy covers the cost of hiring an external contractor to perform
the environmental rehabilitation. Before the end of the reporting period, the
insurer has confirmed it will pay Entity A up to CU1.5 million as the
environmental
rehabilitation is performed.

♦ Solution:
♦ Entity A would recognise a CU1 million provision for environmental rehabilitationcosts and
a corresponding virtually certain insurance reimbursement asset that is limited to CU1m.
Any increase in the estimate of the rehabilitation costs to be incurred up to CU1.5 million
would result in a corresponding increase in the amount recognised for the reimbursement
asset.
Recognising an onerous contract provision

Unavoidable costs
> no Nothing required
Economic benefits?
yes

Provision is lower of:

Recognise provision unless
contract can be terminated ♦ Cost of terminating contract
without penalty
♦ Net cost of continuing
contract
Onerous contract

MR pays L$ 10,000 a month for MR vacates the building

one of its offices because it has found a better
location

The lease has another 12 months MR sublets the building to

to run and cannot be cancelled Planet-Travel for L$ 8,000 a month
Restructuring
Restructuring provisions should include only direct expenditures caused by the
restructuring, not costs that associated with the ongoing activities of the entity.

retraining or Investment in provisions

relocating staff in a new system
Marketing for future
continuing and distribution losses
operation network

On 15 December 20X2, the directors of Proviso Ltd minuted their decision to close the operations of the
loss making space technology division. The decision and an outline of a plan were immediately announced
to employees and a press release was issued. The closure, which began on 4 January 20X3, has an
estimated date for completion, including the sale of the noncurrent assets of the division, of 30 June 20X3.
The costs associated with the closure include the following.

Employee redundancy costs 12,000

Lease termination costs 4,000
Relocating continuing staff to other divisions 3,000
Impairment losses 2,000
21,000
Disclosure
Disclosure
Know your journals
Lila-Production manufactures the robots sold by Lila-Industrial (I-800s) and Lila-Domestic (D-
900s) at a number of sites across Planet Lila. Three years ago Lila-Production was granted
permission to build a factory that uses a new chemical that is revolutionary in making robots
self-aware, but highly poisonous in its natural state. The factory was officially launched by Mrs.
Lila Smith, the founder of Lila-Tech, at the start of Year 1.

The Planet Lila Council imposed the following terms on Lila-Production:

•The site must be restored to its natural state at the end of the 20-year life of the factory.
•The chemical residue must be disposed of in a secure environment as production progresses.

Lila-Production has the following data available:

Factory-related: end of Year 1 Production-related: end of Year 1
Estimated site restoration costs: Number of robots produced 10,000
Undiscounted L$ 43,822 Sold 8,000
Discounted at 4% L$ 20,000 Still in inventory 2,000
Chemical disposal costs incurred 600
Factory-related: end of Year 2 Production-related: end of Year 2
Estimated site restoration costs: Number of robots produced (all sold) 11,000
Undiscounted L$ 52,671 Chemical disposal costs incurred 750
Discounted at 4% L$ 25,000
Required
Determine the journal entries that Lila-Production should record in Year 1 and in Year 2 related to clean-up and chemical disposal costs.
Other entries are not required.
Know your journals

Year-1: Dr Cr
Property, plant and equipment 20,000
Provision 20,000

Inventory (600 x 20%) 120

Profit or loss (COGS) (600 x 80%) 480
Cash/payable 600

Year-2:
Profit or loss (finance costs) (20,000 x 4%) 800
Provision 800

Property, plant and equipment (25,000 – 20,800) 4,200

Provision 4,200

Profit or loss (COGS) 750

Cash/payable 750
 Previous questions
Nov-Dec 2016

2. (a) Hussein Ltd is a manufacturing company which prepares financial statements to 30 September each year. Before the
draft financial statements for the year ended 30 September 2015 can be finalized and approved by the directors, the
following points need to be addressed. Draft net assets at 30 September 2015 were Tk 2,000,000.
i) Hussein Ltd has renewed the unlimited guarantee given in respect of the bank overdraft of a company in which it holds
a significant investment. That company's overdraft amounted to Tk 300,000 at 30 September 2015 and it has net assets
of Tk 1,000,000.
ii) A former director, who was dismissed from the company‟s service on 1 September 2015 for acting outside his
authority, has given notice of his intention to claim substantial damages for loss of office. On 1 November 2015 a claim
was received for Tk 150,000. The company‟s legal advisers have been negotiating with the former director and believe
that the claim will probably be settled at Tk 100,000.
iii) On 15 November 2015 the company sold its former head office building, Castle Wood, for Tk 2,700,000. At the year end
the building was unoccupied and Hussein Ltd had not intended to sell the property for at least another year. The
building's carrying amount (based on cost less accumulated depreciation) was Tk 3,100,000 at the year end.
iv) An overseas division of Hussein Ltd was nationalized in December 2015. The overseas authorities have refused to pay
any compensation. The net assets of the division have been valued at Tk 200,000 at the year end.

Requirement: Prepare extracts from the statement of financial position of Hussein Ltd as at 30 September 2015, including
any relevant notes to the financial statements. 10
 Previous questions
July- Aug 2023
4 (b)TPR has a contract to buy 300 meters of silk from India Co each month for Tk. 18 per meter. From each meter of silk, TPR
makes one silk dress. TPR also incurs labor and other direct variable costs of Tk. 16 per dress. Usually, TPR can sell each dress
for Tk. 40 but in late July 20X8 the market price falls to Tk. 28. TPR is considering ceasing production since TPR thinks that the
market may not improve. If TPR decides to cancel the silk purchase contract without two months’ notice, it must pay a
cancellation penalty of Tk. 2,400 for each of the next months.
Requirement:
i) Is there a present obligation on 31 July 2022? 2
ii) What amount should be recognized in respect of the contract in the financial statements of TPR for the period? 3

March- April 2023

2 c) In which of the following circumstances might a provision be recognized? 5
i) On 13 December 2022, the Board of an entity decided to close down a division. The accounting date of the company is 31
December. Before 31 December 2022 the decision was not communicated to any of those affected and no other steps were
taken to implement the decision.
ii) As (i) above except that the Board agreed a detailed closure plan on 20 December 2022 and details were given to customers
and employees.
iii) A company is obliged to incur clean up costs for environmental damage (that has already been caused).
iv) A company intends to carry out future expenditure to operate in a particular way in the future.
 Previous questions
March- April 2023
5. Nixon Corporation, in preparation of its December 31,2022, financial statements, is attempting to determine the proper
accounting treatment for each of the following situations.

i) As a result of uninsured accidents during the year, personal injury suits for Tk 350,000 and Tk 60,000 have been filed
against the company. It is the judgment of Nixon's legal counsel that an unfavorable outcome is unlikely in the Tk 60,000
case but that an unfavorable verdict approximating Tk. 250,000 will probably result in the Tk. 350,000 case.
ii) Nixon Corporation owns a subsidiary in a foreign country that has a book value of Tk. 5,725,000 and an estimated fair
value of Tk.9,500,000. The foreign government has communicated to Nixon its intention to expropriate the assets and
business of all foreign investors. On the basis of settlements other firms have received from this same country, it is
virtually certain that Nixon will receive 40% of the fair value of its properties as final settlement.
iii) Nixon's chemical product division consisting of five plants is uninsurable because of the special risk of injury to employees
and losses due to fire and explosion. The year 2022 is considered one of the safest (luckiest) in the division's history
because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the
rest of the past decade (ranging from Tk. 60,000 to Tk. 700,000), management is certain that next year the company will
probably not be so fortunate.
iv) Nixon operates profitably from a factory it has leased. During 2022 Nixon decides to relocate these operations to a new
factory. The lease of the old factory continues for the next 5 years. The lease cannot be cancelled, and the factory cannot
be subleased. Nixon determines that the cost to settle the old lease is Tk.950,000.
v) Litigation is being pursued for the recovery of Tk. 1,300,000 consulting fees on a failed project The directors believe it is
more likely than not that their claim will be successful.
Requirements:
a) Prepare the journal entries that should be recorded as of December 31,2022, to recognize each of the situations above. 5
b) Indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain
why. 10
 Previous questions

Nov- Dec 2022

1 c) Narrate the accounting treatment of the below situations: 5+5=10
i) Cosmo Ltd issued a one year guarantee for faulty workmanship on a single item of specialist equipment that is delivered
to a customer. At the company's year-end, the company is being sued by the customer for refusing to replace or repair the
item of equipment within the guarantee period. Cosmo believes the fault is not covered by the guarantee, but instead has
arisen because of the customer not following the operating instructions. The company's lawyer has advised Cosmo that it
is more likely than not that the company will be found liable. This would result in the company being forced to replace or
repair the equipment plus pay court fees and damages amounting to approximately Tk. 20,000. Based on past experience
with similar items of equipment, the company estimates that there is a 70% chance that the control panel would need to
be replaced which would cost Tk. 80,000 and a 30% chance that the repair would only cost about Tk. 30,000.

i) The company also manufactures small items of equipment which it sells via a retail network. The company sold 15,000
items of this type this year, which also have a one year guarantee if the equipment fails. Based on past experience, 5% of
items sold are returned for repair or replacement. In each case, one third of the items returned are able to be repaired at
a cost of Tk. 100, while the remaining two thirds are scrapped and replaced. The manufacturing cost of a replacement
item is Tk. 300

March- April 2022

3. b) On 25 January 2022, Delicious Food Restaurant (DFR) was sued by two customers, Mr. X and Mr. Y, for food poisoning
arising from the consumption of DFR’s cooked food. Mr. X alleged that the food poisoning was related to the food he consumed
at DFR on 24 December 2021 and Mr. Y alleged that the food poisoning was related to the food he consumed at DFR on 15
January 2020. In 10 February 2022, DFR paid Mr. X and Mr. Y Tk.400,000 and Tk. 600,000 respectively, in out of-court
settlements. DFR has adopted a 31 December accounting ear-end.
Requirement: Identify the specific accounting issues involved in each case, and pass the relevant journal entries for the year
ended 31 December 2021. Ignore the tax effects. 6
 Previous questions
May-June 2017
2. (a) NZU Ltd., in preparation of its December 31, 2016, financial statements, is attempting to determine the proper
accounting treatment for each of the following independent situations:
1) As a result of uninsured accidents during the year, personal injury suits for Tk 350,000 and Tk 60,000 have been filed
against the company. It is the judgment of NZU’s legal advisor that an unfavorable outcome is unlikely in the case of Tk
60,000 but that an unfavorable verdict approximating Tk 225,000 will probably result in the case of Tk 350,000.
2) NZU Ltd. owns a subsidiary in a foreign country that has a book value of Tk 5,725,000 and an estimated fair value of Tk
8,700,000. The foreign government has communicated to NZU its intention to expropriate the assets and business of all
foreign investors. On the basis of settlements other firms have received from this same country, NZU expects to receive
40% of the fair value of its properties as final settlement.
3) NZU’s chemical product division consisting of five plants is uninsurable for the special risk of injury to employees and
losses due to fire and explosion. The year 2016 is considered one of the safest (luckiest) in the division’s history because
no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the
past decade (ranging from Tk 60,000 to Tk 700,000), management is certain that next year the company will probably not
be so fortunate.
4) In August, 2016 a worker was injured in the factory in an accident, partially the result of his own negligence. The worker
has sued NZU Ltd. for Tk 800,000. Legal advisor believes it is reasonably possible that the outcome of the suit will be
unfavorable and that the settlement would cost the company from Tk 250,000 to Tk 500,000.
5) A suit for breach of contract seeking damages of Tk 2,400,000 was filed by an author against NZU Ltd. on October 4, 2016.
NZU's legal advisor believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff
is between Tk 600,000 and Tk 1,800,000. No amount within this range is a better estimate of potential damages than any
other amount.
6) NZU is involved in a pending court case. NZU’s lawyers believe it is probable that NZU will be awarded damages of Tk
1,000,000. Requirement:

Discuss the proper accounting treatment and indicate what should be reported relative to each situation in the financial
statements and accompanying notes. Give the rationale for your answers. 12
Thank You