76. Thistlewood Components Ltd has a fixed-price supply contract that, based on current cost projections alone, appears onerous. However, the contract also contains a clause requiring the customer to pay Thistlewood a substantial cancellation penalty if the customer itself cancels, and management's analysis shows this penalty exposure materially reduces Thistlewood's realistic net downside under the contract as a whole. How should the customer's cancellation penalty be reflected in assessing whether the contract is onerous?

A) Treated as increasing the loss under the contract, since a customer cancellation penalty represents additional uncertainty rather than a benefit
B) Factored into the overall comparison of unavoidable costs against expected economic benefits under the contract, since it forms part of the full economic substance of fulfilling versus not fulfilling the arrangement
C) Ignored entirely, since an onerous contract assessment considers only Thistlewood's own direct costs and revenues, not contingent penalties payable by the customer
D) Recognised as a separate contingent asset, entirely unconnected to the onerous contract assessment itself

Correct: B difficult IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 10 and 68

An onerous contract exists where the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it; this comparison necessarily takes into account the whole economic substance of the arrangement, including any bilateral terms, such as a cancellation penalty payable by the customer, that materially affect Thistlewood's realistic net position. If the presence of this contractual protection means Thistlewood's realistic downside is reduced below the threshold at which the contract would otherwise be considered onerous, no onerous contract provision is required, or a smaller one is required than a costs-only view alone would suggest. Option C artificially narrows the assessment to ignore relevant contract terms. Option D wrongly disconnects a term of the very contract being assessed from that assessment. Option A reaches the wrong directional conclusion; a cancellation penalty payable TO Thistlewood reduces, not increases, its net exposure.

77. Ravensworth Mining Ltd measures a decommissioning provision using discounted cash flows. During the year, there is no change to the estimated future decommissioning cash flows, but market yields used to determine the discount rate fall materially, increasing the discount rate risk premium assessment used for this specific liability. Applying the 2019 amendment to IFRIC 1, how should this change in the discount rate alone be reflected?

A) The resulting change in the provision is added to or deducted from the cost of the related asset, in the same way as a change in the estimated cash flows, rather than being recognised immediately in profit or loss
B) The resulting change in the provision is recognised immediately and entirely in profit or loss as a finance cost or credit, since it does not relate to a change in the underlying decommissioning activity
C) No adjustment is made at all, since IFRIC 1 only addresses changes in estimated cash flows, not changes in the discount rate itself
D) The change is recognised directly in other comprehensive income, mirroring the treatment of an actuarial gain or loss on a defined benefit pension obligation

Correct: A difficult IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, paragraph 5 (as amended 2019)

The 2019 amendment to IFRIC 1 extended the existing treatment for changes in estimated cash flows of a decommissioning, restoration, or similar liability to also cover changes arising solely from a revision to the discount rate: both types of remeasurement are added to or deducted from the cost of the related asset (to the extent the asset's carrying amount does not fall below zero, with any excess recognised in profit or loss), rather than being recognised immediately in profit or loss as the routine unwinding of the discount is. This reflects that both cash flow and discount rate changes represent revised estimates of the same underlying decommissioning obligation. Option B incorrectly applies the immediate profit-or-loss treatment reserved for discount unwinding to a different type of remeasurement. Option C incorrectly assumes IFRIC 1 stopped at cash flow changes alone, ignoring the 2019 amendment. Option D wrongly imports an unrelated OCI mechanic from a different standard.

78. A company operates a product warranty programme across three regions with materially different historical claim rates: Region A (2% of units), Region B (5% of units), and Region C (9% of units, due to harsher climate conditions affecting the product). How should the year-end warranty provision be measured?

A) Only the highest regional rate (9%) is applied to all units sold globally, as a prudent worst-case approach
B) A single blended 5.33% average claim rate (simple average of the three regional rates) is applied uniformly to total units sold across all regions
C) The provision is measured by applying each region's own historical claim rate to that region's own unit sales, then aggregating the three region-specific expected values into the total provision, since the populations have materially different risk profiles that a single blended rate would misstate
D) Only the lowest regional rate (2%) is applied, since the entity's overall historical experience should dominate

Correct: C complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 24, 39 (expected value for large populations)

IAS 37's expected value approach for a large population of similar obligations requires the estimate to reflect the actual weighted probabilities across the relevant population. Where sub-populations (here, geographic regions) have materially different risk profiles, using a single blended average would misstate the provision; each segment's own claim experience should be applied to its own population and the results aggregated.

79. A regulation requires an annual safety inspection and certification for entities that continue to operate a specific type of hazardous equipment. The company could avoid this future cost entirely by simply ceasing to operate the equipment, an option genuinely available to it. At the year end, the company intends to continue operating the equipment into the following year. Should a provision be recognised for next year's inspection cost?

A) No provision is recognised, because the future economic outflow depends on the entity's own future actions (continuing to operate the equipment), which it can genuinely avoid; no obligating past event has occurred that creates a present obligation independent of the entity's future conduct
B) Yes, a provision must be recognised since the inspection is a legal requirement for continued use
C) A provision is recognised for 50% of the estimated cost as a compromise, reflecting the likelihood of continued operation
D) A provision is recognised only if the equipment has already failed a previous inspection

Correct: A complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 17-19

IAS 37 requires a present obligation arising from a past event, independent of the entity's future actions. Where an entity can avoid a future cost by its own future conduct (such as ceasing an activity), no present obligation exists merely because it currently intends to continue that activity, since the obligation only crystallises through a future decision, not a past obligating event.

80. A parent company provides a guarantee to a bank in respect of borrowings taken out by an associate (accounted for using the equity method, not consolidated). The associate is currently meeting all its obligations, but there is a possible (not probable) risk it may default within the guarantee period. How should the parent account for this guarantee in its own financial statements?

A) The parent assesses the guarantee based on its own risk of being called upon to perform (here, only possible, not probable), resulting in disclosure as a contingent liability rather than recognition of a provision; this assessment is independent of whether the associate itself has recognised any related liability in its own separate financial statements
B) No disclosure or recognition is required because the associate is not consolidated
C) The guarantee is automatically eliminated in the parent's financial statements as an intra-group balance, as if the associate were a subsidiary
D) The parent recognises a provision for the full guaranteed amount, since it has a legal obligation under the guarantee

Correct: A complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 10, 23, 27; IAS 28 (equity method, separate entity)

A guarantee given on behalf of an associate is assessed from the guarantor's own perspective: recognition as a provision requires a probable outflow, while a merely possible outflow results in contingent liability disclosure only. This assessment is made independently by the parent (guarantor) and does not depend on, or get eliminated by, the associate's equity-accounted (not consolidated) status, since intra-group elimination rules for subsidiaries do not apply to associates.

81. A company is defending a legal claim where the claimant could, at their discretion, ultimately seek either specific performance of a disputed contract term (estimated cost to the company of $2 million if awarded, considered 20% likely) or monetary damages instead (estimated at $600,000, considered 80% likely, given the claimant's stated preference for a quicker cash settlement). How should the provision be measured, given these are mutually exclusive alternative outcomes?

A) The provision is measured at $2 million, the higher of the two possible outcomes, on a prudence basis
B) No provision is recognised because the claimant has not yet elected which remedy to pursue
C) The provision is measured using the probability-weighted expected value across the two mutually exclusive alternative remedies: (20% x $2,000,000) + (80% x $600,000) = $400,000 + $480,000 = $880,000
D) The provision is measured at $600,000 only, since it is the more likely single outcome, ignoring the specific performance possibility entirely

Correct: C complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraph 39

Where a range of possible outcomes exists, IAS 37 requires a probability-weighted expected value calculation, even where the outcomes are mutually exclusive alternative remedies rather than a continuous range. Both scenarios remain probable in combination (the claim itself will almost certainly result in some outflow), so the provision reflects the weighted-average expected cost across the two alternative, mutually exclusive outcomes, not simply the higher amount or the single most likely value alone.

82. A company has an insurance policy with a $50,000 excess (deductible) per claim, above which the insurer covers 100% of costs. A claim event occurs during the year giving rise to an estimated total liability of $300,000. The insurer has acknowledged coverage and payment above the excess is virtually certain. How should this be accounted for?

A) Only the $50,000 excess is recognised as a provision, with the remaining $250,000 obligation not recognised at all since the insurer will pay it directly to the claimant
B) A provision of $300,000 is recognised for the full obligation, with a separate reimbursement asset of $250,000 recognised (the amount above the excess, virtually certain of recovery from the insurer), leaving the company's own net retained exposure effectively limited to the $50,000 excess, presented gross (not netted) in the financial statements
C) The $300,000 is recognised as a reduction of insurance premium expense rather than as a provision
D) A provision of $300,000 is recognised, with no separate treatment of the excess or the insurance recovery

Correct: B complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 53-58 (reimbursements)

The full underlying obligation is recognised as a provision, since the company itself remains primarily liable for the full amount. Separately, IAS 37 permits recognition of a reimbursement asset only when recovery is virtually certain, here for the $250,000 above the excess; this is presented as a separate asset, not netted against the provision, reflecting the requirement for gross presentation.

83. A company plans to relocate a manufacturing facility to a different country specifically to avoid a new environmental levy that would otherwise apply from next year. At the year end, the relocation has been publicly announced and is genuinely underway (contracts signed for the new facility, redundancy notices issued at the old site), with the facility expected to close before the levy's effective date. Does the announced relocation, by itself, create or avoid an obligation for the levy?

A) No provision for the levy arises, because the relocation genuinely and demonstrably avoids the specific future obligating activity (operating the facility after the levy's effective date) through the entity's own real future action, which is a valid basis for concluding no obligation exists - distinct from a token or unconvincing claim of intended avoidance that does not reflect genuine substance
B) A provision must be recognised for the relocation costs themselves as if they were the levy liability
C) A provision for the levy must be recognised regardless of the relocation plan, since the levy will inevitably apply to similar future operations
D) The relocation announcement is irrelevant; only the redundancy provision is assessed, with no consideration of the levy at all

Correct: A complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 17-19 (present obligation, avoidability)

Whether a future cost is genuinely avoidable through the entity's own future actions is a substance question. Where the evidence (signed contracts, redundancies, public announcement) demonstrates the relocation is real and will be completed before the levy's effective date, this substantiates that no obligation for the levy arises, since the obligating activity itself will not occur. This is distinguished from a merely stated intention with no substantive supporting action, which would not be a valid basis for avoiding recognition.

84. A foreign regulator issues a product safety recall order with extraterritorial effect, purporting to require the recall of products manufactured by any entity within a multinational group, even those group entities not directly registered with or subject to that regulator's jurisdiction. How should the wider group's other entities (not directly regulated) assess whether a provision is required?

A) All group entities automatically recognise an identical provision, since the order names the group as a whole
B) No entity in the group is required to consider a provision, since only the regulator's own home country market is affected
C) The provision is recognised centrally at group level only in the consolidated financial statements, with no assessment required in any individual entity's own financial statements
D) Each group entity assesses, based on its own specific legal exposure and the enforceability of the order against it in its own jurisdiction, whether a present obligation (legal or constructive) actually exists for it individually; an order's extraterritorial claim does not, by itself, create a legal obligation for an entity not subject to that regulator's actual jurisdiction, though a constructive obligation could still arise from the group's own voluntary conduct or public commitments

Correct: D complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 10, 17 (legal and constructive obligations)

A regulatory order's stated extraterritorial reach does not automatically create a present legal obligation for an entity not actually subject to that regulator's jurisdiction. Each entity must separately assess whether it has its own legal obligation (based on the law actually applicable to it) or a constructive obligation (based on its own conduct, such as voluntarily extending the recall or public commitments), rather than assuming uniform group-wide recognition based solely on the order's stated scope.

85. A data breach at a company gives rise to three distinct types of potential cost: (1) a regulatory fine, where the regulator has opened a formal investigation but not yet issued findings (assessed as possible, not probable); (2) customer compensation claims, where the company's own legal counsel considers payment probable and reliably estimable based on similar past incidents; and (3) ongoing legal defence costs for responding to the investigation, which relate to future services not yet received. How should these three exposures be treated?

A) All three are combined into a single blended provision measured at a single overall best estimate
B) Only the largest of the three estimated exposures is recognised, with the other two ignored to avoid double-counting
C) No provision or disclosure is required for any of the three exposures until the regulatory investigation concludes
D) Each exposure is assessed separately based on its own distinct obligating event and probability: the regulatory fine is disclosed as a contingent liability (possible, not probable); the customer compensation claims are recognised as a provision (probable and reliably estimable); and the future legal defence costs are not provided for at all, since they relate to services not yet received

Correct: D complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 14, 23, 27 (recognition criteria applied per obligation)

IAS 37 requires each distinct obligation arising from an event to be separately assessed against the recognition criteria, even where they share a common originating event. A merely possible regulatory fine is disclosed, not provided for; a probable and reliably estimable compensation claim is provided for; and future legal defence costs, being a cost of a future service not yet received, are never provided for in advance regardless of their near-certainty.

86. A company has agreed to settle a legal claim via a payment linked to a published consumer price index (CPI) at the date of actual payment, which is expected to occur in three years. How should the provision be measured at the current reporting date?

A) At the original claim amount agreed with no adjustment for the index at all
B) At the best estimate of the amount expected to be paid, incorporating a reasonable estimate of the expected future movement in the index over the three years to the payment date, then discounted to present value; simply using today's index value would understate the expected liability if further index increases are anticipated
C) The provision cannot be measured until the actual payment date is reached and the final index value is known
D) At today's CPI-adjusted value only, ignoring any expected future index movement

Correct: B complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 36-37 (best estimate, future events)

Where a liability's future settlement amount is contractually linked to an external index expected to change before settlement, the best estimate of the provision should incorporate a reasonable projection of that index's expected movement over the period to settlement (where material), rather than assuming no further change; the resulting nominal estimate is then discounted to present value.

87. A company has a $400,000 provision relating to a legal claim. During the year, the claim is fully and finally struck out by the court with no further right of appeal available to the claimant under the applicable procedural rules. How does this differ from a scenario where the claim is merely stayed (paused) pending the outcome of a related test case being heard in a different jurisdiction?

A) Both scenarios require the provision to continue unchanged, since court proceedings of any kind create ongoing uncertainty
B) A stayed claim automatically requires the provision to be increased, while a struck-out claim requires no change
C) Both scenarios require the provision to be released in full immediately, since the claim is not being actively pursued in either case
D) Where the claim is fully and finally struck out with no further appeal available, the underlying obligation has been genuinely extinguished, and the provision is released in full; where the claim is merely stayed pending a related test case, the underlying obligation still potentially exists and the provision should generally continue to be recognised (reassessed for probability and amount based on the pending test case's likely outcome), rather than released

Correct: D complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 59-60 (review and adjustment; use of provisions)

A provision is released only when the underlying obligation is genuinely extinguished. A final strike-out with no right of appeal removes the obligation entirely, justifying release. A stay pending a related test case does not extinguish the obligation - the claim could still proceed and succeed depending on that test case's outcome - so the provision should be reassessed (not necessarily released) based on the best current estimate of the claim's probability and amount in light of the pending related proceedings.

88. New extended producer responsibility (EPR) legislation requires a company to fund recycling of packaging in proportion to the volume of packaged product it places on the market during each year, with the obligation calculated and invoiced retrospectively based on the prior year's sales volumes, as specified by the legislation as the sole basis of measurement. When should the related liability be recognised?

A) Progressively throughout the year, accrued evenly as an estimate as each unit of packaged product is sold, matching the underlying sales activity
B) The obligating event is placing packaged product on the market during the specified measurement period as defined by the legislation; since the legislation measures the obligation by reference to sales volumes as they occur, the liability is recognised progressively as those sales occur during the year, consistent with the specific obligating event the legislation identifies, rather than waiting until the following year's invoicing date
C) Only once the retrospective invoice is actually issued in the following year, since no obligation exists until formally billed
D) At a single point at the very end of the year, regardless of when sales volumes actually occurred during the year

Correct: B complex IFRIC 21 Levies, paragraphs 8-10

Under IFRIC 21 principles, the obligating event is the activity that triggers payment as identified by the legislation. Where the legislation itself measures the obligation by reference to sales volumes occurring progressively through the year (even if invoiced retrospectively later), the liability is recognised as those sales occur, consistent with the specific obligating activity defined, rather than deferred to the administrative invoicing date.

89. A company provides a guarantee to a bank on behalf of an unrelated third-party business (a commercial customer, not a related party) in exchange for a market-rate guarantee fee, as part of an ordinary commercial arrangement. How should this guarantee be initially and subsequently accounted for?

A) It is provided for under IAS 37 using the same probable-outflow threshold as any other contingent liability, exactly as if it were a related-party guarantee
B) If it meets the definition of a financial guarantee contract, it is initially recognised at fair value (which may approximate the fee received) and is subsequently measured, in accordance with IFRS 9, generally at the higher of the amount of the loss allowance determined under the expected credit loss model and the amount initially recognised less cumulative amortisation, rather than being assessed under IAS 37's probable-outflow provision threshold
C) It is recognised as revenue in full immediately upon issuance, with no further liability recognised at all
D) It is entirely outside the scope of any accounting standard since no related party relationship exists

Correct: B complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraph 2(j) (scope exclusion); IFRS 9 Financial Instruments, paragraph 4.2.1(c)

IAS 37 explicitly scopes out financial guarantee contracts that fall within IFRS 9's definition, regardless of whether the beneficiary is a related party or an unrelated commercial counterparty. Such guarantees are initially recognised at fair value and subsequently measured under IFRS 9's specific requirements for financial guarantee contracts, generally at the higher of the ECL-based loss allowance and the amount initially recognised less cumulative amortisation, rather than the ordinary provisions recognition threshold.

90. A manufacturer measures an onerous contract provision for a loss-making supply agreement. In estimating the unavoidable costs of fulfilling the contract, should the cost estimate include an allocation of the factory's general fixed production overheads?

A) Yes, all fixed and administrative overheads across the entire business are allocated pro-rata to the contract regardless of attribution
B) No, only variable direct costs (materials and direct labour) are ever included in an onerous contract cost estimate
C) The cost estimate is based solely on the contract's stated price terms, with no separate cost estimation required
D) Yes, the estimate includes costs that relate directly to the contract, which encompasses an allocation of fixed production overheads directly attributable to completing the contract (such as factory costs for the production line used), but excludes general and administrative overheads that are not directly attributable to fulfilling this specific contract

Correct: D complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraph 68A (cost of fulfilling a contract, 2020 amendment)

IAS 37 (as clarified in the 2020 amendment on the cost of fulfilling a contract) requires the cost estimate for an onerous contract to include costs that relate directly to the contract, comprising both incremental costs and an allocation of other costs directly related to contract activities, such as an allocation of production overheads used to fulfil the contract - but general and administrative costs not directly related to the contract are excluded.

91. A company has entered into a contract that, on review by its legal advisers, is found to be void and unenforceable under the applicable local law due to a defect in how it was executed (for example, a required regulatory consent was never obtained, rendering the contract legally a nullity). Compare this with a second, validly executed contract that is simply very difficult and costly for the counterparty to enforce in practice due to jurisdictional obstacles. How should each be treated for provisioning purposes?

A) The void and unenforceable contract creates no legal obligation at all, since no valid obligation exists in law, and therefore no provision (or even contingent liability disclosure, ordinarily) arises from it; the second contract, despite being difficult to enforce in practice, remains a valid legal obligation and is assessed for a provision or contingent liability in the ordinary way, since practical enforcement difficulty does not negate the existence of a valid obligation
B) Neither contract creates any obligation, since all provisioning requires a written, court-confirmed judgment first
C) Both contracts give rise to a legal obligation and require a provision to be assessed in the same way
D) The difficult-to-enforce contract is disregarded entirely because enforcement is unlikely, while the void contract is fully provided for as a precaution

Correct: A complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraph 10 (definition of a legal obligation)

A present obligation under IAS 37 requires a valid obligation to exist. A contract that is void and unenforceable under the applicable law creates no legal obligation at all, since it has no legal effect, and so ordinarily gives rise to neither a provision nor a contingent liability. By contrast, a validly executed contract remains a genuine legal obligation even if practically difficult or costly to enforce; practical enforcement difficulty is not the same as the absence of a valid obligation, so this contract is still assessed under the normal provisions/contingencies framework.

92. A company is uncertain whether it, or a fellow subsidiary within the same group, is the entity legally responsible for an environmental clean-up obligation at a site historically used by both entities at different times under an ambiguous internal cost-sharing arrangement that was never formally documented. How should the company assess whether to recognise a provision in its own individual financial statements?

A) Neither entity recognises any provision until the group's ultimate parent formally allocates the liability internally
B) The provision is automatically shared equally 50/50 between the two entities regardless of actual usage or legal responsibility
C) The company must assess, based on the actual facts (evidence of usage, correspondence, any informal agreements, and the applicable environmental law's rules on liable parties), whether it individually has a present legal or constructive obligation for some or all of the clean-up cost; genuine uncertainty about which group entity bears the obligation does not exempt either entity from making its own separate assessment, and if the company's own share cannot be reliably identified but an obligation is probable, a best estimate must still be attempted, potentially with disclosure of the uncertainty
D) The company automatically recognises the full provision, since it is easier administratively for one entity in the group to record it

Correct: C complex IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 10, 14, 25 (obligating entity and best estimate)

Each legal entity must assess its own present obligation based on the facts and applicable law, since IAS 37 obligations attach to the entity that is legally or constructively obligated, not to the group as an administrative convenience. Ambiguity about internal group allocation does not remove the requirement to assess and, where a probable obligation exists but its precise share is uncertain, to make a best estimate, with appropriate disclosure of the underlying uncertainty.

93. An entity sells a product line to another company, and as part of the sale agreement, the buyer contractually assumes responsibility for all outstanding warranty claims relating to units already sold before the sale. The seller had previously recognised a warranty provision of $400,000 for this product line. How should the seller and the buyer each account for this warranty obligation as a result of the sale?

A) The seller continues to recognise the warranty provision in full even after the sale, since the obligation originally arose from the seller's own past sales
B) The buyer recognises the liability at the seller's original IAS 37 carrying amount, with no fair value remeasurement permitted
C) The seller derecognises its warranty provision entirely, since the legal obligation has been assumed by the buyer under the sale agreement (a novation), and the buyer, as acquirer of the product line, recognises a corresponding liability measured at its fair value at the acquisition date under IFRS 3, which may differ from the seller's own IAS 37 carrying amount
D) Neither party recognises any liability at all, since the warranty relates to units already sold before the transaction date

Correct: C complex IAS 37 / IFRS 3 - transfer of a warranty obligation in a business/product line sale, derecognition and fair value recognition

Where a business or product line sale includes a contractual assumption of an existing obligation by the buyer, the seller's original provision is extinguished (derecognised) because it is no longer the entity with the obligation. The buyer, having acquired a business (or business-like set of assets and liabilities), recognises the assumed liability as part of its IFRS 3 acquisition accounting, measured at its acquisition-date fair value, which need not equal the seller's own best-estimate IAS 37 carrying amount, since fair value reflects a market participant's perspective rather than the seller's own estimation basis.

94. Under the sale and purchase agreement for the disposal of a subsidiary, the seller retains contractual responsibility for any tax liabilities relating to periods before the sale completion date (a tax indemnity or 'look-back' clause), even though the seller no longer owns or controls the subsidiary. Shortly before the reporting date, the tax authority opens an enquiry into the subsidiary's pre-disposal tax affairs, and the seller's advisers consider an additional tax liability probable and reliably estimable. How should the seller account for this?

A) No liability is recognised by the seller, since it no longer owns or controls the subsidiary and the tax matter now belongs entirely to the subsidiary's new owner
B) The seller can only disclose this as a contingent liability, regardless of how probable or reliably estimable the amount is, since the underlying tax matter relates to an entity it no longer controls
C) The seller recognises its own provision under IAS 37 for the estimated indemnity payment, because the sale and purchase agreement's indemnity clause creates a present, separate contractual obligation of the seller itself (independent of ownership or control of the subsidiary), for which a probable outflow can be reliably estimated
D) The liability is recognised by the subsidiary's new owner instead, since the tax enquiry relates to the subsidiary's own historical tax position

Correct: C complex IAS 37 - provision for a retained contractual indemnity obligation following disposal of a subsidiary

A tax indemnity or 'look-back' clause in a sale and purchase agreement creates a distinct contractual obligation of the seller, separate from its former ownership of the subsidiary. Once an outflow under that indemnity becomes probable and can be reliably estimated (here, following the tax authority's enquiry), the seller recognises its own IAS 37 provision for the estimated indemnity payment, since the obligation is the seller's own, arising from the indemnity clause in the disposal agreement, not from any continuing relationship with the subsidiary itself.

95. An entity with a large, homogeneous portfolio of warranty claims uses an actuarial 'run-off triangle' technique (similar to methods used in general insurance reserving) to estimate its warranty provision, projecting the ultimate cost of claims based on historical claims development patterns by cohort of sale. Is this estimation technique appropriate for measuring a warranty provision under IAS 37?

A) This technique may only be used for insurance contracts within the scope of IFRS 17 and can never be applied to an IAS 37 warranty provision
B) Yes, IAS 37 requires the best estimate of the expenditure required to settle the obligation, and where a large population of similar obligations exists, a sophisticated statistical or actuarial technique such as a claims development (run-off) triangle is an appropriate and often more reliable way of arriving at that best estimate than a simple flat percentage applied to sales, provided the technique is applied consistently and its assumptions are reasonable
C) The technique is acceptable only if it produces exactly the same result as a simple expected value calculation, otherwise it must be discarded
D) No, IAS 37 permits only a simple expected value calculation based on a single historical claims percentage, and prohibits more sophisticated actuarial estimation techniques

Correct: B complex IAS 37 - expected value measurement for a large population, sophisticated actuarial estimation techniques

IAS 37 requires provisions to be measured at the best estimate of the expenditure required to settle the obligation, and specifically notes that where a provision involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (expected value). A claims development (run-off) triangle is a recognised, more sophisticated actuarial technique for estimating expected ultimate claims cost from a large population based on historical development patterns, and its use is entirely consistent with, and often produces a more reliable best estimate under, IAS 37's expected value principle for large populations of similar obligations.

96. An entity faces a large, complex environmental remediation obligation with numerous interacting uncertain variables (contamination extent, remediation method, regulatory approval timing). Rather than a simple expected value calculation, the entity's specialist consultants use a statistical simulation technique (running thousands of randomised scenarios across the interacting variables) to generate a probability distribution of possible total remediation costs, from which the entity selects its best estimate. Is this approach consistent with IAS 37?

A) Yes, IAS 37's best estimate requirement does not mandate any single, specific calculation method; using a statistical simulation technique to generate a probability distribution across genuinely interacting uncertain variables, and then selecting an appropriate point estimate from that distribution (such as its mean, reflecting the expected value principle for a range of possible outcomes), is a legitimate and often more robust way of arriving at the required best estimate for a complex liability with multiple interacting sources of uncertainty
B) This approach is only permitted for financial instruments measured under IFRS 9 and can never be used for an IAS 37 provision
C) No, because IAS 37 requires a single deterministic 'most likely outcome' figure and prohibits deriving a best estimate from a probability distribution generated by simulation
D) The simulation output must always be discarded in favour of the single scenario the consultants consider most likely, regardless of how the interacting variables actually behave

Correct: A complex IAS 37 - best estimate derived from a sophisticated statistical simulation technique for interacting uncertain variables

IAS 37 does not prescribe a single mechanical calculation method for the best estimate; it requires management to use judgement, supplemented by experience of similar transactions and, where appropriate, independent expert advice, to arrive at the best estimate of the expenditure required to settle the obligation. Where a liability involves numerous genuinely interacting uncertain variables, a statistical simulation technique that models those interactions to generate a probability distribution, from which an appropriate point estimate (such as the expected value) is selected, is an entirely legitimate and often superior estimation approach compared with a simplistic single deterministic scenario.

97. A banking levy is calculated by reference to the entity's total liabilities as measured at several specific snapshot dates spread throughout the calendar year (for example, the last day of each quarter), rather than a single year-end date or continuously accruing activity. Under IFRIC 21 principles, when does the obligating event(s) for this levy arise, and how should the liability be recognised during the year?

A) No liability is recognised at all until the very last snapshot date of the year, with none of the levy relating to earlier snapshot dates recognised progressively
B) A separate obligating event occurs at each specified snapshot date, so the entity recognises the portion of the levy liability relating to each snapshot only when that specific date is reached, based on its total liabilities measured at that date, resulting in the total annual levy liability being built up incrementally across the several separate obligating events rather than recognised all at once at any single point
C) The entire annual levy liability is recognised in full at the very start of the year, since the entity knows it will be liable at some point based on its ongoing activities
D) The levy is recognised evenly on a straight-line basis over the year regardless of the specific snapshot dates specified in the legislation

Correct: B complex IFRIC 21 - multiple separate obligating events for a levy assessed at several specified snapshot dates during the year

IFRIC 21 identifies the obligating event for a levy as the activity that triggers payment as identified by the legislation. Where a levy's legislation specifies multiple distinct measurement (snapshot) dates during the year, each such date is itself a separate obligating event, and the liability relating to each snapshot is recognised only when that specific date is reached and the measurement is taken, rather than recognising the whole annual amount at a single point or spreading it evenly on a straight-line basis unrelated to the actual specified trigger dates.

98. An entity owns an office building constructed several decades ago, when asbestos-containing insulation material was legal and commonly used. The material remains safely contained within the building's structure and poses no risk as long as it is left undisturbed; no law currently requires its removal while undisturbed. The entity has no plans to renovate or demolish the building. Should a provision be recognised for the eventual cost of asbestos removal?

A) The obligation arises the moment the building was originally constructed with the material present, regardless of any subsequent decision to renovate or leave it undisturbed
B) Yes, a provision must always be recognised for the full estimated removal cost, since the entity is aware the material is present and will eventually need to be removed at some point in the building's life
C) No provision is recognised while the material remains safely contained and undisturbed and no renovation or demolition is planned, because there is no present legal or constructive obligation requiring removal in these circumstances; a provision would only become appropriate once the entity commits to a renovation or demolition that would actually disturb the material and trigger a removal requirement, or a change in law creates an unavoidable obligation
D) A provision is recognised at 50% of the estimated removal cost as a standard prudent practice for any building known to contain asbestos, regardless of whether it is disturbed

Correct: C complex IAS 37 - no present obligation for undisturbed contained hazardous material absent a triggering disturbance event

A provision requires a present obligation as a result of a past event, with no realistic alternative to settling it. Merely owning a building containing safely contained, undisturbed asbestos does not itself create such an obligation, because the entity has a realistic alternative: continuing to leave the material undisturbed, which is neither illegal nor unsafe in itself. A present obligation (and therefore a provision) only arises once the entity commits to an action, such as renovation or demolition, that would actually disturb the material and trigger a legal removal requirement, or where a change in law creates an obligation regardless of disturbance.

99. An entity enters into a contract to lease office space for five years, with a break clause allowing early termination after year two upon payment of a contractually fixed, precisely known penalty amount stated in the lease agreement itself. At the reporting date, the entity has already decided, with certainty, to exercise the break clause at the earliest opportunity. Should the fixed break penalty be recognised as an IAS 37 provision?

A) No, IAS 37 applies only to liabilities of uncertain timing or amount; here, both the amount (a contractually fixed penalty stated in the lease) and, given the entity's certain decision, effectively the timing are already known with precision, so this is not a 'provision' in the IAS 37 sense at all but an ordinary liability (or an onerous lease assessment under lease accounting/IAS 37's own onerous contract provisions, if relevant) recognised according to the general recognition criteria applicable to a known, certain obligation
B) The penalty can never be recognised as a liability at all until the break clause is actually exercised and the payment is legally due
C) The penalty must be discounted using a risk-free rate reflecting only the time value of money regardless of whether it is already a known, certain amount payable in the near term
D) Yes, this is a textbook IAS 37 provision, since it relates to a future contractual payment the entity will need to make

Correct: A complex IAS 37 - scope boundary distinguishing a provision (uncertain timing or amount) from an ordinary liability of known, certain amount

IAS 37 defines a provision specifically as a liability of uncertain timing or amount, distinguishing it from other liabilities where both the timing and amount are reasonably certain. A contractually fixed break penalty, stated precisely in the lease agreement, with the entity having already certainly decided to exercise the clause, lacks the defining uncertainty that characterises an IAS 37 provision; it is recognised as an ordinary liability once the recognition criteria for a liability are met, rather than being assessed and disclosed using IAS 37's provision-specific recognition and measurement framework designed for uncertain obligations.

100. A new industry safety standard has been drafted and is widely expected to become mandatory within the next two years, but has not yet been formally enacted into law. Before the reporting date, the entity issues a public press release announcing that it will voluntarily upgrade all of its products to comply with the new standard ahead of the mandatory deadline, creating a valid expectation among customers and regulators that it will do so. Does this create a constructive obligation under IAS 37 before the standard is formally enacted?

A) A provision must be recognised for the full estimated cost of compliance with every new standard the moment it is merely drafted, regardless of whether the entity has made any public commitment
B) No, a constructive obligation can never arise before a standard is formally enacted into law, regardless of any public commitment the entity itself has made
C) The obligation only arises once the entity has actually begun physically upgrading any products, regardless of what it has publicly announced beforehand
D) Yes, a constructive obligation can arise from the entity's own public announcement of a specific, voluntary commitment that creates a valid expectation among those affected that the entity will discharge that commitment, even though the underlying legal requirement is not yet formally enacted; the obligation here arises from the entity's own conduct and announcement, not from the not-yet-enacted law itself

Correct: D complex IAS 37 - constructive obligation from a specific public announcement, independent of formal enactment of the underlying requirement

A constructive obligation under IAS 37 can arise from an entity's own past practice, published policies, or a sufficiently specific current statement that creates a valid expectation in other parties that it will discharge certain responsibilities, entirely independently of whether a corresponding legal obligation exists or has been formally enacted. Here, the entity's own public press release announcing a specific voluntary commitment to early compliance creates precisely this kind of valid expectation among customers and regulators, giving rise to a constructive obligation from the point of that announcement, regardless of the formal enactment status of the underlying new standard.