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Example 1: Warranties (as extracted from Appendix to FRS 102 Section 21A.4)
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On the basis of experience, it is probable (i.e. more likely than not) that there will be some claims under the warranties.
1) Present obligation as a result of a past obligating event – The obligating event is the sale of the product with a warranty, which gives rise to a legal obligation. The past event is the sale of the product to the customer.
2) An outflow of resources embodying economic benefits in settlement: – Probable for the warranties as a whole to be paid as the company has a history of warranty claims so they are expected.
3) Measured reliably – as the company has a history of past warranty claims it can measure the provision reliably.
Conclusion: The entity recognises a provision for the best estimate of the costs of making good under the warranty products sold before the reporting date.
In 20X0, goods are sold for CU1,000,000. Experience indicates that 90 per cent of products sold require no warranty repairs; 6 per cent of products sold require minor repairs costing 30 per cent of the sale price; and 4 per cent of products sold require major repairs or replacement costing 70 per cent of sale price. Therefore estimated warranty costs are:
|
CU1,000,000 X 90% X 0 = CU0 CU1,000,000 X 6% X 30% = CU18,000 CU1,000,000 X 4% X 70% = CU28,000 Total CU46,000
|
The expenditures for warranty repairs and replacements for products sold in 20X0 are expected to be made 60 per cent in 20X1, 30 per cent in 20X2, and 10 per cent in 20X3, in each case at the end of the period. Because the estimated cash flows already reflect the probabilities of the cash outflows, and assuming there are no other risks or uncertainties that must be reflected, to determine the present value of those cash flows the entity uses a ‘risk-free’ discount rate based on government bonds with the same term as the expected cash outflows (6 per cent for one-year bonds and 7 per cent for two-year and three-year bonds). Calculation of the present value, at the end of 20X0, of the estimated cash flows related to the warranties for products sold in 20X0 is as follows:
|
Year |
|
Expected cash payments (CU) |
Discount rate |
Discount Factor |
Present Value (CU) |
|
1 |
60% CU46,000 |
27,600 |
6% |
0.9434 (at 6% for 1 year) |
26,038 |
|
2 |
30% CU46,000 |
13,800 |
7% |
0.8734 (at 7% for 2 years) |
12,053 |
|
3 |
10% CU46,000 |
4,600 |
7% |
0.8163 (at 7% for 3 years) |
3,755 |
|
Total |
|
|
|
|
41,846 |
The entity will recognise a warranty obligation of CU41,846 at the end of 20X0 for products sold in 20X0. The journal required is to debit cost of sales and credit provisions.
NOTE: if in this example, the company also sold extended warranty above the standard warranty, any revenue from the sale is deferred and recognised over the extended warranty period.
Example 2: Refunds policy (as extracted from Appendix to FRS 102 Section 21A.5)
A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known.
Present obligation as a result of a past obligating event – The obligating event is the sale of the product, which gives rise to a constructive obligation because the conduct of the store has created a valid expectation on the part of its customers that the store will refund purchases.
An outflow of resources embodying economic benefits in settlement – Probable that a proportion of goods will be returned for refund based on past experience.
Conclusion: The entity recognises a provision for the best estimate of the amount required to settle the refunds.
Example 3: Staff retraining as a result of changes in the income tax system (as extracted from Appendix to FRS 102 Section 21A.8)
The government introduces changes to the income tax system. As a result of those changes, an entity in the financial services sector will need to retrain a large proportion of its administrative and sales workforce in order to ensure continued compliance with tax regulations. At the end of the reporting period, no retraining of staff has taken place.
Present obligation as a result of a past obligating event – The tax law change does not impose an obligation on an entity to do any retraining. An obligating event for recognising a provision (the retraining itself) has not taken place. The entity could hire new staff who are already trained in order to avoid this cost.
Conclusion: The entity does not recognise a provision.
If the law changes in the future, this may create for a requirement for a provision where an action has been taken to get an entity to accept a liability or an entity accepts a liability.
Example 4: Provision required for a future date
Company A operated a waste management plant for many years. Due to the chemicals used in the operation, the land on which the plant operates has been contaminated which has impacted the quality of the water supply. The company does not have to legally correct this contamination. At 31 December 2014, the company decides that it is not going to accept liability and on this basis no provision is required as the entity does not have a constructive or legal obligation.
At 31 December 2015, in order to maintain goodwill with the locals and as is consistent with plants with similar issues around the world, the entity makes a public announcement that it will implement procedures to clean up the contaminated land over the next number of years. At 31 December 2015, a provision is required to be booked for the best estimate of the cost as the entity has a constructive obligation as it has communicated to interested parties that it will make good any damage.
Example 5: Court case where difficulty assessing whether present obligation exists (Extracted from Section 21.9 of FRS 102)
A customer has sued Entity X, seeking damages for injury the customer allegedly sustained from using a product sold by Entity X. Entity X disputes liability on grounds that the customer did not follow directions in using the product. Up to the date the board authorised the financial statements for the year to 31 December 20X1 for issue, the entity’s lawyers advise that it is probable that the entity will not be found liable. However, when the entity prepares the financial statements for the year to 31 December 20X2, its lawyers advise that, owing to developments in the case, it is now probable that the entity will be found liable.
(a) At 31 December 20X1
Present obligation as a result of a past obligating event: On the basis of the evidence available when the financial statements were approved, there is no obligation as a result of past events as the entity sees that the customer was at fault.
Conclusion: No provision is recognised. The matter is disclosed as a contingent liability unless the probability of any outflow is regarded as remote.
(b) At 31 December 20X2
Present obligation as a result of a past obligating event: On the basis of the evidence available, there is a present obligation. The obligating event is the sale of the product to the customer.
An outflow of resources embodying economic benefits in settlement: Probable.
Conclusion: A provision is recognised at the best estimate of the amount to settle the obligation at 31 December 20X2, and the expense is recognised in profit or loss. It is not a correction of an error in 20X1 because, on the basis of the evidence available when the 20X1 financial statements were approved, a provision should not have been recognized at that time.
NOTE: had management believed at 31 December 20×1 that the likelihood of a transfer of economic benefits were remote, no disclosure would be required.
Example 6: reimbursement by a third party
A case has been taken against company A by an employee for personal injury. Company A is insured for such claims. At year end the company believes the conditions for a provision to be recognised applies. The provision calculated is CU100,000, this includes estimated fees of CU5,000. The company is covered in full under its insurance policy other than for fees. The likelihood of receiving the proceeds is certain as the insurer has to cover this. At year end the company would recognise an asset for CU95,000 on the balance sheet and set this against the provision posted in the P&L so as to show a net debit in the profit and loss of CU5,000 which relates to the legal fees which are not reimbursed.
If in the above example there was an issue whereby the insurance company felt they may not pay, the asset would not be recognised.
Example 7: determining most likely outcome where a single obligation
A case has been taken against Company A and the company will have to pay damages of CU500,000. Company A believes it is 60% likely that they will have to pay this. Therefore at year end a provision of CU500,000 is required which may need to be present valued where the time value of money is significant. No probabilities are applied to this rate as there is only one possible outcome.
Example 8: Estimating a provision
Where there is only a single obligation, then the best estimate to settle this should be utilised (the most probable outcome is used).
Example 9: Present valuing a provision, change in estimate/cash flow and change in discount rate
For Company A a provision at the start of year 1 is required for CU200,000 after the effects of inflation with respect to a legal case taken against the company. The case is scheduled to finish at the end of year 4. The risk free discount rate for a government bond for four years at the date of inception is 4.5%. At the end of year 2, the estimated payout is CU210,000 before the effects of inflation. At the end of year 3, the risk free discount rate fluctuated to 4%. See below how these would be accounted for:
|
Year |
Opening Provision |
PV Original Provision at year end from inception using 4.5% discount rate* |
PV revised provision at end of year 2 at discount rate of 4.5% ** |
PV revised provision at year end from end of year 3 at discount rate of 4% *** |
|
Start of year 1 |
|
167,712* |
|
|
|
1 |
167,712 |
175,259 (167,712*1.045) |
n/a |
n/a |
|
2 |
175,259 |
183,146 (175,259*1.045) |
192,303** |
n/a |
|
3 |
183,146 |
191,388 (183,146*1.045) |
200,957 (192,303*1.045) |
201,923*** |
|
4 |
191,388 |
200,000 (191,388*1.045) |
210,000 (200,957*1.045) |
210,000 (201,923*1.04) |
|
*CU200,000*((1/1.045^4)) |
||||
|
**CU210,000*((1/1.045^2)) |
||||
|
***CU210,000*((1/1.04^1)) |
||||
Note 1: Narrative for change in estimate
Following the change in estimate at the end of year 2 the difference of CU9,157 (i.e. the difference between the carrying amount under the original estimate of CU183,146 at the end of year 2 as detailed above and the present value of the revised estimate of CU210,000 which was CU192,303), would be charged as an operating expense item. The difference of CU7,887 between the opening balance under the original provision at the end of year 1 of CU175,259 and the closing balance under the original provision at the end of year 2 of CU183,146 prior to the calculation of the provision for the new estimate represents the unwinding of the discount.
Note 2: Narrative for change in discount rate
Following the change in discounts rate at the end of year 3 the difference of CU966 (the difference between the carrying amount under the revised estimate of CU200,957 at the end of year 3 as detailed above and the present value of the revised amount using the 4% discount rate of CU201,923), would be charged as an operating expense item. The difference of CU8,654 between the opening balance under the revised provision at the end of year 2 of CU192,303 and the closing balance under the revised provision at the end of year 3 of CU200,957 prior to the calculation of the provision incorporating the new discount rate represents the unwinding of the discount.
Therefore the journals required throughout the four year period is as follows:
Year 1
|
|
CU |
CU |
|
Dr Operating Expenses |
167,712 |
|
|
Cr Provision |
|
167,712 |
Being journal to reflect the initial recognition of the provision at its present value
|
|
CU |
CU |
|
Dr Finance Cost (CU175,259-CU167,712) |
7,547 |
|
|
Cr Provision |
|
7,547 |
Being journal to reflect the unwinding of the discount
Year 2
|
|
CU |
CU |
|
Dr Finance Cost (CU183,146-CU175,259) |
7,887 |
|
|
Cr Provision |
|
7,887 |
Being journal to reflect the unwinding of the discount
|
|
CU |
CU |
|
Dr Operating Expenses (CU192,303-CU183,146) |
9,157 |
|
|
Cr Provision |
|
9,157 |
Being journal to reflect the catch up for the change in estimate
Year 3
|
|
CU |
CU |
|
Dr Finance Cost (CU200,957-CU192,303) |
8,654 |
|
|
Cr Provision |
|
8,654 |
Being journal to reflect the unwinding of the discount
|
|
CU |
CU |
|
Dr Operating Expenses (CU201,923-CU200,957) |
966 |
|
|
Cr Provision |
|
966 |
Being journal to reflect the catch up for the change in discount rate
Year 4
|
|
CU |
CU |
|
Dr Finance Cost (CU210,000-CU201,923) |
8,077 |
|
|
Cr Provision |
|
8,077 |
Being journal to reflect the unwinding of the discount
Example 10: Onerous lease
Company A entered into a lease on an office block in year 1 for a 10 year period for CU100,000 per annum. At the end of year 4, due to economic circumstances and reductions in staff the entity no longer has any use for the property and cannot sublease it but are contractually tied in for a further 6 years from that date. The company has discussed with the landlord as to the cost of terminating the lease early which they stated would be CU500,000.
As the entity is contractually committed to pay the lease, there is a present obligation as a result of a past event i.e. the signing of the contract to take on the lease for 10 years for which no further benefits will be obtained and a reliable estimate can be determined, a provision should be recognised for the lower of the cost to terminate of CU500,000 or the future lease amounts payable for 6 years of CU600,000. Therefore a provision should be recognised for CU500,000 and should be present valued where it is considered material.
Example 11: Onerous lease
Take example 10, and this time the entity can sublet the property for the remaining 6 years to a tenant for CU50,000 per annum. In this case a provision would be required for the amount by which the costs exceed the economic benefits which would be the amount net of sublease income which is CU300,000 present valued where material ((CU100,000-CU50,000)*6 years). Even if the premises has not been sublet by the end of year 6, the CU300,000 should still be used where it can be proven that there is a market for the property maybe through evidence provided by an auctioneer and there is evidence of the likely lease per annum that can be obtained. The income received from the sub-tenant would be shown as other income in the financial statements. The provision would be reduced year on year for the amount paid to the tenant in the year. The journals assuming present valuing was not required would be to:
|
|
CU |
CU |
|
Dr Provision |
50,000 |
|
|
Cr Rent Cost |
|
50,000 |
Being journal to reflect the reduction of the provision at each year end
|
|
CU |
CU |
|
Dr Rent Costs |
100,000 |
|
|
Cr Bank |
|
100,000 |
Being journal to reflect the payment of funds to the landlord
|
|
CU |
CU |
|
Dr Bank |
50,000 |
|
|
Cr Rental Income |
|
50,000 |
Being journal to reflect the receipt of funds from the subtenant.
Example 12: Onerous supply contract
Company A entered into a purchase contract with a supplier for 3 years (minimum amount of units to be ordered per annum is 50,000) at a time when supply of raw materials were scarce for a cost of CU10 per unit. A year later, the price for the same raw material was CU4, however the entity is contractually obliged to purchase a further 100,000 at a minimum from that supplier. The company can still sell the finished goods product which incorporates this part at the higher price at a profit of CU5.
Given that the entity makes a profit overall on the product there is no onerous contract so therefore no provision is required.
If we take the above example and this time assume that the product will be discontinued at the end of year 2 and during year 2, 40,000 finished goods will be sold incorporating the profit of CU5. Therefore in assessing whether an onerous contract exists there would be a need to take the net additional costs of the excess units of CU360,000 (60,000*(CU10-CU4) from the total profit from the sale of the 40,000 units in year 2 of CU200,000 (CU5 profit on finished good * 40,000 units). Therefore a provision should be made for the difference of CU160,000 at the end of year 1.
The same logic as example 12 would be applied to an onerous sales contract.
Example 13: Future operating losses (Extracted from Section 21A.1 of FRS 102)
An entity determines that it is probable that a segment of its operations will incur future operating losses for several years.
Present obligation as a result of a past obligating event: There is no past event that obliges the entity to pay out resources.
Conclusion: The entity does not recognise a provision for future operating losses. Expected future losses do not meet the definition of a liability. The expectation of future operating losses may be an indicator that one or more assets are impaired (see Section 27 Impairment of Assets).
Example 14: Closure of a division: no implementation before end of reporting period (Extracted from Section 21A.6 of FRS 102)
On 12 December 20X0 the board of an entity decided to close down a division. Before the end of the reporting period (31 December 20X0) the decision was not communicated to any of those affected and no other steps were taken to implement the decision.
Present obligation as a result of a past obligating event: There has been no obligating event, and so there is no obligation.
Conclusion: The entity does not recognise a provision.
Example 15: Closure of a division: communication and implementation before end of reporting period (Extracted from Section 21A.6 of FRS 102)
21A.7 On 12 December 20X0 the board of an entity decided to close a division making a particular product. On 20 December 20X0 a detailed plan for closing the division was agreed by the board, letters were sent to customers warning them to seek an alternative source of supply, and redundancy notices were sent to the staff of the division.
Present obligation as a result of a past obligating event: The obligating event is the communication of the decision to the customers and employees, which gives rise to a constructive obligation from that date, because it creates a valid expectation that the division will be closed.
An outflow of resources embodying economic benefits in settlement: Probable as it can be reliably measured.
Conclusion: The entity recognises a provision at 31 December 20X0 for the best estimate of the costs that would be incurred to close the division at the reporting date.
Example 16: Restructuring provision – no formal plan
Company A has approved a restructuring of its operations at a board meeting. They have made a formal announcement to all those effected parties. However management have a very general plan as to what locations are to be closed but no final decision has been made.
In this instance although they have a constructive obligation (i.e. the formal communication to the effected parties) they have not a detailed plan of action detailing which locations will be closed and the number of employees that will be made redundant. As there is no detailed plan as required by Section 21.C(a) a provision cannot be created at the year end.
Example 17: Contingent liability – remote
An employee has taken a case against Company A for unfair dismissal. At year end management have consulted with its legal advisor who believe the possibility of the employee succeeding with the case is remote.
Here there is a present obligation (i.e. the obligation to possibly compensate the employee) as a result of a past event (i.e. the dismissal of the employee) but the likelihood of outflow of economic benefits is remote i.e. not probable. In this particular case, no disclosure is required.
Example 18: Contingent liability – possible
An employee has taken a case against Company A for unfair dismissal. At year end management have consulted with its legal advisor who believe there is a possibility that the employee will succeed however it is not remote. In this particular case this should be disclosed in the notes to the financial statements.
Example 19: Contingent liability – occurrence or non-occurrence of future events/non ability to estimate liabilities
Company A is an insurance underwriter that earns profit commission from insurance companies based on the number of claims made on policies that it has arranged for the insurance company. The commissions recognised can change in future years depending on the future loss ratios in relation to unsettled claims. Given the fact that the ratios can change year on year, the directors believe that it is not possible to estimate any future liabilities. On this basis although it is probable that there will be future economic outflows/inflows, and although there is a present obligation as a result of a past event (i.e. the recognising of commissions year on year), these cannot be measured reliably hence it is appropriate to disclosure these as a contingent liability.
Example 20: Contingent assets
Company A has taken a case against company B. At the year end, Company A has won the case and been awarded CU200,000 in damages. However, prior to year end. Company B, appealed to the high court.
Here as there is a risk that Company B might be successful in the appeal, as the asset is not virtually certain, it cannot be recognised, instead it should be disclosed on the basis that it is probable. However the facts and circumstances for each event will need to be looked at to assess if this actually is probable or just possible.
Example 21: Financial guarantees
Company A has provided a guarantee to the bank on behalf of company B whereby they have guaranteed the repayment of a loan if Company B defaults. At the end of year 1, company B is in a very strong financial position. However at the end of year 2, company B is in financial difficulty with very poor cash flows due to the loss of its main customer and as a result there is risk with regard to its going concern.
Based on the facts at the end of year 1, a contingent liability would exist or possibly a contingent liability which requires no disclosure as the probability is remote because:
- Although there is a present obligation as a result of a past event (i.e. the giving of the guarantee to the bank)
- The outflow of economic benefits it not probable as Company B is in a very strong position
Based on the facts at the end of year 2, a provision should be recognised for the estimated cost of honoring the guarantee on the basis that the likelihood of the transfer of economic benefits is probable.
Example 22: Decommissioning reinstatement costs
A manufacturing plant leased land for 50 years and constructs a factory on this. As part of the lease agreement it must reinstate the land to its original condition. It builds a plant on the land. At that point a provision is made in the books at its estimated present value cost in 50 years time of CU500,000. The accounting required for this transaction is:
|
|
CU |
CU |
|
Dr Fixed Asset |
500,000 |
|
|
Cr Provision |
|
500,000 |
Being journal to recognise the decommissioning cost
On a yearly basis depreciation is charged to write it down over the 50 year life i.e. CU10,000 per annum.
In year 10 the new estimate of the present value cost to reinstate the land is CU600,000. The NBV at that date is CU400,000 (CU500,000/50 yrs*10yrs). Assume the liability included in the accounts after unwinding of the discount is 550,000. The journals required at this time is as follows:
|
|
CU |
CU |
|
Dr Fixed Asset (CU600,000-CU550,000) |
50,000 |
|
|
Cr Provision |
|
50,000 |
Being journal to write the liability up to the new estimate
From that date the new carrying amount per annum of the asset is CU450,000 (NBV of CU400,000+change in estimate of CU50,000). The depreciation over the remaining life is as follows: New cost of CU450,000/40 yrs =CU11,250
|
|
CU |
CU |
|
Dr Depreciation |
11,250 |
|
|
Cr Accumulated Depreciation |
|
11,250 |
Being journal to reflect the depreciation to be charged from year 10 on
Example 23: Reinstatement provision on property which is held on operating lease
Company A took out a 10 year lease on a vacant property in year 1. On signing the lease, the company incurred CU300,000 on fitting out the property. As part of the lease agreement Company A has to reinstate the property to its original condition. The present value of the estimated cost of this reinstatement is CU50,000. Therefore as with example 22, the restoration cost is capitalised and written off over its lease life of 10 years with the unwinding of the discount posted to finance costs. For changes in the estimated costs, the same process applies as was detailed in Example 22.
Example 24: Dilapidation requirement
Company A leased an office premises and as part of the lease agreement they are required to keep it to the standard it was obtained in. In this case a provision is recognised over the 10 years with the provision increased yearly for the estimated cost of reinstating the property for that particular year. Provision made on the basis that the recognition criteria for a provision are met.
Example 25: Inclusion of future operating losses in a provision for termination of operations under old GAAP
During the year ended 31 December 2013 Company A made a formal announcement to all effected parties that the Company would cease trading on 30 April 2014. At the 31 December 2013 under old GAAP a provision of CU1 million was included for the cost of closure including the cost of redundancies. Included in this provision was CU300,000 for the cost of future losses for the period 1 January to 30 April 2014. The provision for future losses as part of a closure provision was allowed under old GAAP. Assume the deferred tax rate is 10% and the date of transition is 1 January 2014 and the provision was allowable for tax purposes.
Under Section 21 of FRS 102, future operating losses cannot be included in a closure provision. As a result the following transition adjustments are required:
On 1 January 2014
|
|
CU |
CU |
|
Dr Provisions |
300,000 |
|
|
Cr Profit and Loss Reserves |
|
300,000 |
Being journal to reverse the future operating losses included in the provision
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax (CU300,000*10%) |
30,000 |
|
|
Cr Deferred Tax Liability |
|
30,000 |
Being journal to reflect deferred tax on the above adjustment as a tax deduction was obtained in 2013 however since it has now been taken out it is then a deferred tax liability. A deduction will not be allowed until 2014.
Adjustment required in 2014 financial statements assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Administrative Expenses |
300,000 |
|
|
Cr Provisions |
|
300,000 |
Being journal to reflect reversal of transition posting on 1 January 2014 above for the fact that losses were incurred in 2014 and the provision under old GAAP in 2013 would have been reversed, therefore this journal ensures the losses are shown in the 2014 financial statements.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
30,000 |
|
|
Cr Deferred Tax P&L |
|
30,000 |
Being journal to reflect the reversal of the deferred tax previously recognised.
No further adjustments are required in the 2014 and 2015 books. If the provision was booked in the 31 December 2014 year end, then the opening transition journal above would be to debit administration costs in the P&L as opposed to profit and loss reserves. The 2015 journal would be the same as the 2014 journal above. The same deferred tax journal would be posted in the year ended 31 December 2014 as was posted on 1 January 2014 and this deferred tax will reduce over a 5 year period in line with the tax transition rules.
Example 26: Extract from accounting policy and notes required in financial statements for provisions
a) Provisions
Provisions are recognised when the company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount of the obligation can be estimated reliably.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as a finance cost.
The extent a legal or constructive obligation exists, the acquisition costs include the present value of estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to/and or deducted from carrying value of the related asset. To the extent the change results in a negative carrying amount, the difference is recognised in the profit and loss. The change in depreciation is recognised prospectively.
Or where remediation provisions are required include the below:
Environmental liabilities
Liabilities for environmental costs are recognised when environmental assessments determine clean-ups are probable and the associated costs can be reasonably estimated. Generally the timing of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of active sites. The amount recognised at the balance sheet date is the latest best estimate of the expenditure required.
Discounted liabilities in respect of environmental liabilities and closures costs have been classified between amounts due within one year and due after one year. Provisions for long term obligations are discounted at a rate of X%.
OR where closure costs include the below
Closure costs
All costs associated with the decision to cease trading have been recognised in these financial statements. These include a write down of assets, provisions for expected closure costs together with profit and losses expected to be incurred up to date of cessation of trading.
Extract from notes to the financial statements
|
Environmental remediation/closure costs provision |
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
At 1 January |
XXXXX |
XXXXX |
|
Utilised during the year to cover remediation costs |
(XXXXX) |
(XXXXX) |
|
Utilised during the year to cover closure costs |
(XXXXX) |
(XXXXX) |
|
Addition in remediation provision |
XXXXXX |
XXXXXX |
|
Provision carried at 31 December |
XXXXX |
XXXXX |
|
|
|
|
|
Split as follows: |
|
|
|
Amounts falling due within one year (note X) |
XXXXX |
XXXXX |
|
Amounts falling due after one year (note X) |
XXXXX |
XXXXX |
|
|
XXXXX |
XXXXX |
The company used a hazardous chemical in its production process up to 31 December 200X. As a result of spillages, this chemical has contaminated the soil under and around the company’s former factory. The company commissioned environmental experts who have assessed the damage, developed a program to remediate the damage, and estimated the costs involved. The remediation process is ongoing and proceeding according to an action plan agreed with the relevant authorities.
The directors have reviewed the adequacy of the remediation provision at 31 December 2015. Despite reports received from the environmental experts, the actual remaining term of the remediation programme cannot be assessed with reasonable certainty at this point in time. The company has considered the costs based on a further 10, 20 and 50 year period, weighted by probability to arrive at a provision.
The closure costs associated with the wind up of the company have also been provided for on a basis to match the probable direction of the remediation programme.
Alternative example disclosure for provisions
|
Provisions for liabilities |
Warranty Provision |
Redundancy provision |
Onerous lease provision |
|
|
CU |
CU |
CU |
|
At 1 January |
XXXXX |
XXXXX |
XXXXX |
|
Utilised during the year |
XXXXX |
XXXXX |
XXXXX |
|
Additions in the year |
XXXXX |
XXXXX |
XXXXX |
|
Unused amounts reversed to profit and loss |
|
|
|
|
Capitalised in cost asset |
|
|
|
|
Exchange adjustment |
XXXXX |
XXXXX |
XXXXX |
|
Unwinding of the discount (not required) |
XXXXX |
XXXXX |
XXXXX |
|
|
XXXXXX |
XXXXXX |
XXXXXXX |
(i) Maintenance warranty provision
A provision is recognised on warranty claims on products sold during the last 2 years. It is expected the majority of these will be settled in the next year and all will have settled within two years.
(ii) Redundancy provision
During the year the company announced a detailed restructuring plan to cease the production of certain raw materials for its finished product and instead outsource this from the supplier. As a result of this decision, XX staff will have to be made redundant. It is expected these staff will be made redundant in the next financial year.
(iii) Onerous lease
As a result of the decision to cease production, the premises in which this production was carried out is no longer required however the company is contractually committed to continue to lease the premises from the landlord for a further 5 years for which a tenant cannot be secured. As a result an onerous lease provision has been created.
Note to be included where the costs are considered exceptional in nature
|
Exceptional item |
2015 |
2014 |
|
|
CU |
CU |
|
Employee termination costs |
XXXXX |
– |
|
Inventory write down |
XXXXX |
– |
|
Fixed asset impairment |
XXXXX |
– |
|
|
XXXXXX |
– |
(i) The exceptional item arises from a fundamental restructuring of the company as a result of a decision to cease trading at one of the companys factories. As a result of the decision to cease certain employees are to be made redundant.
Example 27 – Extract from accounting policy and notes to the financial statements
Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
Contingencies
A legal action is pending against the company for alleged unfair dismissal. The directors under advisement from their legal team expect that the claim will be successfully defended. Should the company be unsuccessful in the action the maximum estimated settlement is not expected to exceed CU10,000. It is not practicable as yet to state the timing of the any possible payment.
A legal case has been taken against the company, the outcome of which is uncertain. There is a contingent liability in the range of CU0 to CU400,000 in respect of this case. It is not practicable as yet to state the timing of any possible payment.
A customer has commenced a legal action against the company for defective workmanship. The directors under advisement by their legal team believe that it is possible but not probable the action will succeed and therefore no provision has been made in these financial statements. Should the action succeed the estimated liability would be CU100,000.
There is a potential contingent asset/liability in the future in relation to profit commission agreements entered into with various product producers. However in the opinion of the directors it is not practicable to provide an estimate of the financial effect of this contingent asset/liability as it is based on future loss ratios in relation to unsettled claims.
It is not anticipated that any material liabilities will arise from the contingent liabilities other than those provided for.
Example 28 – Extract from accounting policy and notes to the financial statements
Contingencies
Contingent liabilities, arising as a result of past events, are not recognised when (i) it is not probable that there will be an outflow of resources or that the amount cannot be reliably measured at the reporting date or (ii) when the existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the company’s control. Contingent liabilities are disclosed in the financial statements unless the probability of an outflow of resources is remote.
Contingent assets are not recognised. Contingent assets are disclosed in the financial statements when an inflow of economic benefits is probable.
Contingent asset
The company is currently pursuing a compensation claim due to the losses sustained as a result of restrictions placed on the company’s assets by a competitor. The claim arose as a result of the loss of earnings due to restrictions imposed on the usage of these assets. The company won a case in the High Court and were awarded damages of CUXXXX and costs. The defendants have appealed the matter to the Supreme Court and the company awaits a date for the hearing of the claim. The company’s legal advisors are confident that the award of damages and costs to the company will not be overturned.
Example 29 – Extract from notes to the financial statements showing prejudicial disclosure
A legal action is pending against the company for a claim for personal injuries. The directors under advisement from their legal team expect that the claim will be successfully defended. Any further information usually required by S.21 of FRS 102 is not disclosed, because to do so would seriously prejudice the outcome of the litigation.
Example 30 – Extract from notes to the financial statements – off balance sheet arrangements
Off-balance sheet arrangements
The company entered into a guarantee with XYZ Bank on behalf of another group company to guarantee the loans in order to allow the subsidiary to expand its operations.
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