ACCA考试F7财务报告辅导

II. Specific application

1. Future operating losses

In the past， provisions were recognized for future operating losses on the grounds of prudence. However these should not be provided for the following reasons.

①They relate to future events;

②There is no obligation to a third party. The loss-making business could be closed and the losses avoided.

2. Onerous contracts

An onerous contract is a contract in which the unavoidable costs of meeting the contract exceed the economic benefits expected to be received under it.

A common example of an onerous contract is a lease on a surplus factory. The leaseholder is legally obliged to carry on paying the rent on the factory， but they will not get any benefit from using the factory.

The least net cost of an onerous contract should be recognized as a provision. The least net cost is the lower of the cost of fulfilling the contract or of terminating it and suffering any penalty payments.

Some assets may have been bought specifically for the onerous contract. These should be reviewed for impairment before any separate provision is made for the contract itself.

1Demo

Droopers has recently bought all of the trade， assets and liabilities of Dolittle， an unincorporatd business. As part of the take-over all of the combined business’s activities have been relocated at Droopers main site. As a result Dolittle’s premises are now empty and surplus to requirements.

However， just before the acquisition Dolittle had signed a three year lease for their premises at $6000 per calendar month. At 31 December 2003 this lease ad 32 months left to run and the landlord had refused to terminate the lease. A sub-tenant had taken over part of the premises for the rest of the lease at a rent of $2500 per calendar month.

Required

（a） Should Droopers recognized a provision for an onerous contract in respect of this lease？

（b） Show how this information will be presented in the financial statements for 2003 and 2004. Ignore the time value of money.

Solution：

Droopers has a legal obligation to pay a further $192000 to the landlord， as a result of a lease signed before the year end. Therefore an onerous contract exists and must be provided for.

There is also an amount recoverable form the sub-tenant of $80000（32×2500）。 This will be shown separately in the balance sheet as an asset.

The $192000 payable and the $80000 recoverable can be netted off in the income statement.

income statements　　2003　2004

$　$

provision for onerous lease contract

（net）112000 Dr.　-

net rental payable on lease （72-30）　-42000 Dr

release of provision　42000 Cr

112000 Dr.　-

balance sheets

receivalbes

amounts recoverable from sub-tenants80000 Dr.50000 Dr

liabilities

amounts payable on onerous contracts192000 Cr120000 Cr

3. Restructuring

A restructuring is a programme that is planned and controlled by management and has a material effect on：

①The scope of a business undertaken by the reporting entity in terms of the products or services it provides; or

②The manner in which a business undertaken by the reporting entity is conducted;

Restructuring includes terminating a line of business， closure of business locations， changes in management structure， and refocusing a business’s operations.

Restructuring provisions have always been quite common， and have often been misused. IAS37 restricts the recognition of restructuring provisions to situations where an entity has a constructive obligation to restructure.

A constructive obligation will only arise if：

①There is a detailed formal plan for restructuring. This must identify the businesses， locations and employees affected; and

②Those affected have a valid expectation that the restructuring will be carried out. This can be by starting to implement the plan or by announcing it to those affected.

The constructive obligation must exist at the year-end. （Any obligation arising after the year end may require disclosure under IAS10）

A board decision alone will not create a constructive obligation unless：

①The plan is already being implemented. For example， assets are being sold， redundancy negotiations have begun; or

②The plan has been announced to those affected by it. The plan must have a strict timeframe without unreasonable delays; or

③The Board itself contains representatives of employees or other groups affected by the decision. （This is common in mainland Europe.）

An announcement to sell an operation will not create a constructive obligation. An obligation will only arise when a purchaser is found and there is a binding sale agreement.

A restructuring provision should only include the direct costs of restructuring. These must be both：

（a） Necessarily entailed by the restructuring; and

（b） Not associated with the ongoing activities of the entity;

The following costs must not be provided for because they relate to future events：

（a） Retaining or relocating staff;

（b） Marketing;

（c） Investment in new systems and distribution networks;

（d） Future operating losses （unless arising from an onerous contract）

（e） Profits on disposal of assets.

2Demo

On 15 January 2005 the Board of Directors of Shane voted to proceed with two reorganization schemes. Shane’s financial year end is 31 March， and the financial statements will be finalized and published on 30 June.

Scheme 1

The closure costs will amount to $125000. The factory is rented on a short-term lease， and there will be no gains or losses arising on this property. The closure will be announced in June， and will commence in August.

Scheme 2

The costs will amount to $45000 （after crediting $105000 profit on disposal of certain machines）。 The closure will take place in July， but redundancy negotiations began with the staff in March.

Required

Explain and calculate the year-end restructuring provision

Solution：

Scheme 1 The obligation arises in June， after the year end， and so there will be no provision. However， the announcement in June should be disclosed as an event after the balance sheet.

Scheme 2 Although the closure will not begin until July， the employees will have had a valid expectation that it would happen when the redundancy negotiations began in March. Therefore a provision should be recognized. The provision will be for $150000 because the expected profit on disposal cannot be netted off against the expected costs.

4. Environmental provisions

These are often referred to as clean-up costs because they usually relate to the cost of decontaminating and restoring an industrial site when production has ceased. Merely causing damage or intending to clean-up a site will not create an obligation. Generally， a provision will only be recognized if there is a legal obligation to repair environmental damage. However， some entities publish specific corporate guidelines that include environmental awareness. If these guidelines create a constructive obligation to clean-up then a provision will be required.

The full cost of an environmental provision should be recognized as soon as the obligation arises. Because it may be many years before the costs relating to the provision are incurred the provision is normally recognized at its present value. As the day of payment draws nearer， the discount unwinds and the provision increase. The increase in the provision will be charged to the income statement as a finance cost.

It is common for modern extraction licenses to include an obligation to clean-up when the license expires. In these situations， the present value of the clean-up costs are treated as part of the cost of the license.

3Demo

On 1 January 2006 scrubber paid the Government of Metallica $5m for a three year license to quarry gravel. At the end of the license Scrubber must restore the quarry to its natural state. This will cost a further $3m. These costs will be incurred on 1 January 2009. Scrubber’s cost of capital is 10%.

Required

Prepare all relevant extracts from Scrubber’s financial statements for 2006 to 2009.

5. Contingent liabilities and contingent assets

（1） Contingent assets

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

An example of a contingent asset is a legal claim being made by an entity. If the claim is successful， then the entity will receive compensation. However， the outcome is uncertain and not within the control of the entity.

A contingent asst should not be recognized. It may be disclosed if the future inflow of economic benefits is probable.

If the future inflow of benefits is virtually certain， then it ceases to be a contingent asset. It will then be recognized as a normal asset.

（2） Contingent liabilities

A contingent liability is：

（a） A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

（b） A present obligation that arises from past events but is not recognized because： （1） it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or （2） the amount of the obligation cannot be measured with sufficient reliability.

A contingent liability should not be recognized. It must be disclosed， unless the possibility of a future outflow of economic benefits is remote.

Contingent liabilities should be reviewed regularly. If an outflow of economic benefits becomes probable then they must be reclassified as provisions.

History Question Analysis

Question 1 （Q3/December 2003）

IAS 37’ Provisions， Contingent Liabilities and Contingent Assets’ was issued in 1998. The Standard sets out the rinciples of accounting for these items and clarifies when provisions should and should not be made. Prior to its issue， the inappropriate use of provisions had been an area where companies had been accused of manipulating the financial statements and of creative accounting.

Required：

（a） Describe the nature of provisions and the accounting requirements for them contained in IAS 37.（6 marks）

（b） Explain why there is a need for an accounting standard in this area. Illustrate your answer with three practical examples of how the standard addresses controversial issues. （6 marks）

［答疑编号10010301：针对该题提问］

（a） IAS 37 ‘Provisions， Contingent Liabilities and Contingent Assets’ only deals with those provisions that are regarded as liabilities. The term provision is also generally used to describe those amounts set aside to write down the value of assets such as depreciation charges and provisions for diminution in value （e.g. provision to write down the value of damaged or slow moving inventory）。 The definition of a provision in the Standard is quite simple; provisions are liabilities of uncertain timing or amount. If there is reasonable certainty over these two aspects the liability is a creditor. There is clearly an overlap between provisions and contingencies. Because of the ‘uncertainty’ aspects of the definition， it can be argued that to some extent all provisions have an element of contingency. The IASB distinguishes between the tow by stating that a contingency is not recognized as a liability if it is either only possible and therefore yet to be confirmed as a liability， or where there is a liability but it cannot be measured with sufficient reliability. The IASB notes the latter should be rare.

The IASB intends that only those liabilities that meet the characteristics of a liability in its Framework for the Preparation and Presentation of Financial Statements should be reported in the balance sheet.

IAS 37 summarises the above by requiring provisions to satisfy all of the following three recognition criteria：

- there is a present obligation （legal or constructive） as a result of a past event;

- it is probable that a transfer of economic benefits will be required to settle the obligation;

A provision is triggered by an obligating event. This must have already occurred， future events cannot create current liabilities. The first of the criteria refers to legal or constructive obligations. A legal obligation is straightforward and uncontroversial， but constructive obligations are a relatively new concept. These arise where a company creates an expectation that it will meet certain obligations that is not legally bound to meet. These may arise due to a published statement or even by a pattern of past practice. In reality constrictive obligations are usually accepted because the alternative action is unattractive or may damage the reputation of the company. The most commonly quoted example of such is a commitment to pay for environmental damage caused by the company， even where there is no legal obligation to do so.

To summarise： a company must provide for a liability where the three defining criteria of a provision are met， but conversely a company cannot provide for a liability where they are not met. The latter part of the above may seem obvious， but it is an area where there has been some past abuse of provisioning as is referred to in （b）。

（b） the main need for an accounting standard in this area is to clarify and regulate when provisions should and should not be made. Many controversial areas including the possible abuse of provision are based on contravening aspects of the above definitions. One of the most controversial examples of provisioning is in relation to future restructuring or recognization costs （often as part of an acquisition）。 This is sometimes extended to providing for future operating losses. The attraction of providing for this type of expense/loss is that once the provision has been made， the future costs are then charged to the provision such that they bypass the income statement （of the period when they occur）。 Such provisions can be glossed over by management as ‘exceptional items’， which analysts are expected to disregard when assessing the company’s future prospects. If this type of provision were to be incorporated as a liability as part of a subsidiary’s net assets at the date of costs and operating losses （unless they are for an onerous contract） do not constitute past events.

Another important change initiated by IAS 37 is the way in which environmental provisions must be treated. Practice in this area has differed considerably. Some companies did provide for such costs and those that did often accrued for them on an annual basis. If say a company expected environmental site restoration cost of $10 million in 10 years time， it might argue that this is not a liability until the restoration is needed or it may accrue $1 million per annum for 10 years （ignoring discounting）。 Somewhat controversially this practice is no longer possible. IAS 37 requires that if the environmental costs are a liability （legal or constructive）， then the whole of the costs must be provided for immediately. That has led to large liabilities appearing in some companies’ balance sheets.

A third example of bad practice is the use of‘big bath’ provisions and over provisioning. In its simplest form this occurs where a company makes a large provision， often for non-specific future expenses， or as part of an overall restructuring package. If the provision is deliberately overprovided， then its later release will improve future profits. Alternatively the company could charge to the provision a different cost than the one is was originally created for IAS 37 addresses this practice in two ways： by not allowing provisions to be created if they do not meet the definition of an obligation; and specifically preventing a provision made for one expense to be used for a different expense. Under IAS 37 the original provision would have to be reversed and a new one would be created with appropriate disclosures. Whilst this treatment does not affect overall profits， it does enhance transparency.

Note： other examples would be acceptable.

（c） Bodyline sells sports goods and clothing through a chain of retail outlets. It offers customers a full refund facility for any goods returned with in 28days of their purchase provided they are unused and in their original packaging. In addition， all goods carry a warranty against manufacturing defects for 12 months from their date of purchase. For most goods the manufacturer underwrites this warranty such that Bodyline is credited with the cost of the goods that are retumed as faulty. Goods purchased from one manufacturer， Header， are sold to Bodyline at a negotiated discount which is designed to compensate Bodyline for manufacturing defects. No refunds are given by Header， thus Bodyline has to bear the cost of any manufacturing faults of these goods.

Bodyline makes a uniform mark up on cost of 25% on all goods it sells， except for those supplied from Header on which it makes a mark up on cost of 40%. Sales of goods manufactured by Header consistently account for 20% of all Bodyline’s sales.

Sales in the last 28 days of the trading year to 30September 2003 were $1，750，000. Past trends reliably indicate that 10% of all goods are returned under the 28-day return facility. These are not faulty goods. Of these 70% are later resold at the normal selling price and the remaining 30% are sold as ‘sale’ items at half the normal retail price.

In addition to the above expected returns， an estimated $160，000 （at selling price） of the goods sold during the year will have manufacturing defects and have yet to be returned by customers. Goods returned as faulty have no resale value.

Required：

Describe the nature of the above warranty/return facilities and calculate the provision Bodyline is required to make at 30 September 2003：

（ⅰ） for goods subject to the 28 day returns policy; and

（ⅱ） for good that are likely to be faulty. （8 marks）

（c） Guarantees or warranties appear to have the attributes of contingent liabilities. If the goods are sold faulty or develop a fault within the guarantee period there will be a liability， if not there will be no liability. The IASB view this problem as two separate situations. Where there is a single item warranty， it is considered in isolation and often leads to a discloseable contingent liability unless the chances of a claim are thought to be negligible. Where there are a number of similar items， they should be considered as a whole. This may mean that whilst the chances of a claim arising on an individual item may be small， when taken as a whole， it should be possible to estimate the number of claims from past experience. Where this is the case， the estimated liability is not considered contingent and it must be provided for.

 

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