IAS 37 – Provisions & Contingencies Cases

1. IAS 37 – Provisions & ContingenciesCases December 2002

2. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Warranties A manufacturer gives warranties at the time of sale to the purchasers of its product. Under the terms of the contract, manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On past experience, it is probable that there will be some claims under the warranties. Y Y Y

3. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Refunds Policy 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 knows Y Y Y

4. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Legal requirement to fit smoke filters Under new legislation, an enterprise is required to fit smoke filters to its factories by June 30 2003. The enterprise has not fitted the smoke filters. At the balance sheet date of 31 december 2002? N Y N

5. Examples- Measurement Case 02.1 An entity faces 100 legal claims, each with a 40% likelihood of success with no cost, and a 60% likelihood of failure with a cost of each claim of 1m. Case 02.2 An entity faces a single legal claim, with a 40% likelihood of success with no cost, and a 60% likelihood of failure with a cost of 1m. Case 02.3 An entity is required to replace a major component in an asset under a warranty. Each replacement costs 1m. From experience, there is a 30% chance of a single failure, 50% chance of two failures, and a 20% chance of three failures.

6. Examples- Measurement Case 02.4 An entity is required to replace a major component in an asset under a warranty. Each replacement costs 1m. From experience, there is a 40% chance of a single failure, 30% chance of two failures, and a 30% chance of three failures.

7. Examples- recognition of an asset when recognising a provision Case 03.1 Decommissioning an oil rig Commissioning of a new oil rig which creates an obligation to incur costs of decommissioning in the future, but also gives access to future economic benefits from oil reserves. Case 03.2 Decommissioning a quarry[1] or open-cast mine Costs incurred at the end of a quarry’s life that are of two types: removal of plant and other site preparation work which was installed at the time of commissioning; and restoration of site damage which has been progressively created as material is extracted from the quarry. [1] A place where stone etc. is dug out from the ground

8. Examples- recognition of an asset when recognising a provision Case 03.3 Major refit and repair costs Ships and aircraft that are required to undergo major work at regular intervals for example, a ship that is required to undergo a dry dock overhaul every 5 years.

9. Examples- restructuring provisions • BOD announced a restructuring plan at December 20, 2002. • The estimated restructuring costs were as follows: • Termination benefits to be paid: 2 mio € • Productivity losses during the closure period of the plant: 0,4 mio € • Relocation of machines to other plants: 0,9 mio € • Outplacement costs: 0,7 mio €

10. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Contaminated Land and Constructive Obligation An enterprise in the oil industry causes contamination and operates in a country with no environmental legislation. However, the enterprise has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. The enterprise has a record of honouring this published policy. Y Y Y

11. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Closure of a Division On December 12, 2000 the board of an enterprise decided to close down a division. Before the balance sheet date (12/31/2000) the decision was not communicated to any of those affected and no other steps were taken to implement the decision. N N N

12. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Staff Retraining as a Result of Changes in the Income Tax System • The government introduces a number of changes to the income tax system. As a result of these changes, an enterprise 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 financial services regulation. At the balance sheet date, no retraining of staff has taken place. N Y N

13. Present obligation as a result of a past obligating event Outflow of resources is probable Contingent Liability Provision Examples- Recognition • Single Guarantee During 1999, Enterprise A gives a guarantee of certain borrowings of Enterprise B, whose financial condition at that time is sound. During 2000, the financial condition of Enterprise B deteriorates and at 30 June 2000 Enterprise B files for protection from its creditors. At 31 December 1999 Y N N Y