151. A jurisdiction introduces a new plastic packaging tax, levied on a manufacturer for each tonne of plastic packaging it places on the market that contains less than a specified minimum percentage of recycled content, with the obligating event defined in the legislation as the act of placing the non-compliant packaging on the market (i.e., each individual sale of packaged goods using non-compliant packaging). A manufacturer sells non-compliant packaged goods steadily throughout the year. How should the manufacturer recognise this levy across its interim and annual reporting periods?

A) The plastic packaging tax is recognised progressively throughout the year, as each unit of non-compliant packaged goods is actually placed on the market (sold), since that act - not a single fixed date - is the legislation's own defined obligating event, consistent with the general IFRIC 21 principle that a levy triggered by an activity occurring progressively over a period is itself recognised progressively as that activity occurs
B) No liability is recognised until the tax return is filed and formally assessed by the tax authority after the year end
C) The tax is capitalised as part of the cost of the plastic packaging material inventory rather than recognised as a period liability
D) The entire year's estimated plastic packaging tax is recognised in full at the very start of the year, since the manufacturer already knows its packaging will not meet the recycled-content threshold for the whole year

Correct: A difficult IFRIC 21 - plastic packaging tax, progressive obligating event based on sales of non-compliant packaging

IFRIC 21 requires identifying the specific activity that legislation defines as triggering the obligation to pay a levy; where that activity (here, placing non-compliant packaged goods on the market through sale) occurs progressively and repeatedly throughout the year rather than at a single specified date, the corresponding liability is recognised progressively as each triggering sale occurs, mirroring the treatment applied to other progressively-triggered levies (such as one based on revenue earned) and contrasted with a levy whose obligating event is instead a single point-in-time threshold or licence-holding date.

152. A ship-breaking (vessel recycling) yard is legally required, under hazardous waste regulations, to safely dispose of asbestos, oil sludge, and other hazardous materials recovered from each vessel it dismantles, with the disposal obligation arising specifically from the entity's own act of purchasing and beginning to dismantle a particular vessel (not from any earlier event). The yard purchases a vessel for dismantling shortly before year end and begins preliminary dismantling work, but has not yet reached the stage of extracting the hazardous materials. Should a provision be recognised at year end for the eventual hazardous waste disposal cost?

A) Yes - the obligating event is the yard's own act of acquiring the vessel and commencing the dismantling process with the specific intention (and legal obligation) of extracting and disposing of its hazardous content, which has already occurred by year end, creating a present obligation for the eventual disposal cost, reliably estimable from the vessel's known specifications, even though the physical extraction has not yet taken place - analogous to a decommissioning obligation arising from the act of installing/acquiring an asset, not from the later act of eventually decommissioning it
B) The hazardous waste disposal cost is treated as a general future operating cost of the yard's ongoing business, with no specific provision ever recognised for any individual vessel
C) No provision is recognised at all until the hazardous materials are actually physically extracted from the vessel, since only then does the entity possess the specific waste requiring disposal
D) A provision is recognised for 100% of the disposal cost only once the vessel is fully and completely dismantled

Correct: A difficult IAS 37 - ship-breaking yard hazardous waste disposal provision, obligating event at vessel acquisition for dismantling

Mirroring the decommissioning provision principle (where the obligating event is the acquisition/installation of the asset that will eventually require decommissioning, not the later act of decommissioning itself), a ship-breaking yard's legal obligation to safely dispose of a specific vessel's hazardous content arises from its own past act of acquiring that particular vessel for dismantling with the associated legal disposal obligation already attached, creating a present obligation reliably estimable from the vessel's known composition, even before the hazardous materials are physically extracted.

153. On 1 July a group acquires 100% of Target Ltd. Target is defendant in a breach-of-contract suit: its lawyers put the chance of losing at 30%, with damages of CU 2,000,000 if it loses. Target's own financial statements disclose only a contingent liability. The acquirer's valuer measures the acquisition-date fair value of the obligation, reflecting the probability-weighted and time-discounted outflows, at CU 520,000. How does the acquirer account for the lawsuit in its consolidated financial statements at the acquisition date?

A) It recognises a liability of CU 600,000 (30% x CU 2,000,000), because probability-weighted expected value is the IAS 37 measure, and the amount is added to the consideration transferred and goodwill
B) It recognises a liability of CU 520,000 among the identifiable liabilities assumed, because a present obligation exists and its fair value is reliably measurable, so the 30% probability does not bar recognition and goodwill rises by CU 520,000
C) It recognises the liability at CU 520,000 but charges the amount immediately to profit or loss as a post-combination expense, leaving goodwill and the net identifiable assets acquired unchanged
D) It recognises no liability and only discloses a contingent liability, because the outflow is not probable, and IAS 37 recognition thresholds apply to liabilities assumed in a business combination just as in ordinary accounting, with details given in the contingent liabilities note and no effect on goodwill

Correct: B difficult IFRS 3 / IAS 37 - contingent liabilities assumed in a business combination measured at acquisition-date fair value

IFRS 3 modifies the IAS 37 rule for liabilities assumed in a business combination: a contingent liability is recognised at acquisition-date fair value if it is a present obligation arising from a past event and its fair value can be measured reliably, even though an outflow is not probable. The CU 520,000 therefore forms part of the identifiable net assets acquired and increases goodwill. Disclosure-only treatment applies in ordinary accounting but not here, CU 600,000 ignores both fair value and discounting, and charging the amount to profit or loss would ignore that the obligation existed at the acquisition date.

154. A group recognised a CU 520,000 contingent liability in its acquisition accounting for Target Ltd (the lawsuit assumed at fair value). The measurement period has since ended. At the next year end, following an adverse first-instance ruling, an outflow is now probable and the IAS 37 best estimate is CU 800,000. No amount has been recognised under IFRS 15 in respect of the liability. How is the liability measured and where is the CU 280,000 increase recorded?

A) The liability is carried at CU 800,000, the higher of the IAS 37 amount and the initial CU 520,000, and the CU 280,000 increase is recognised in profit or loss, not in goodwill
B) The liability is carried at CU 800,000 and the CU 280,000 increase is added to goodwill, because the lawsuit existed at the acquisition date and the ruling merely confirms the acquisition accounting
C) The liability stays at CU 520,000 until paid, because contingent liabilities recognised in a business combination are held at their acquisition-date fair value throughout, with changes only disclosed
D) The liability is carried at CU 800,000 and the CU 280,000 increase is charged against opening retained earnings as the correction of an error in the original acquisition accounting

Correct: A difficult IFRS 3 / IAS 37 - subsequent measurement of a contingent liability recognised in a business combination

After the measurement period, a contingent liability recognised in a business combination is measured at the higher of (a) the amount that would be recognised under IAS 37 and (b) the amount initially recognised less, where appropriate, cumulative income recognised under IFRS 15. Here the higher amount is CU 800,000, and the CU 280,000 remeasurement goes to profit or loss. Goodwill is not adjusted after the measurement period unless the original accounting contained an error, and the liability is not frozen at fair value.

155. On 20 December an entity offers CU 40,000 to each of its 100 employees who volunteer to leave. Employees may accept until 31 January, no law or contract stops the entity from withdrawing the offer before an employee accepts, and the entity has not yet announced a formal restructuring plan. By 31 December 35 employees have accepted, and management expects a further 25 to accept before 31 January. What liability for termination benefits is recognised at 31 December?

A) CU 1,400,000 (35 x CU 40,000), because the entity can still withdraw the offer for those who have not accepted, so a liability arises only as each employee accepts
B) CU 2,400,000 (60 x CU 40,000), the number expected to accept in total, because the offer was communicated before the year end and the outflow is probable, and a constructive obligation therefore exists
C) CU 4,000,000 (100 x CU 40,000), because the offer has been communicated to every employee and a constructive obligation therefore exists for the whole workforce
D) Nil until 31 January, because termination benefits are recognised only when the acceptance period closes and the final number of leavers is known with certainty

Correct: A difficult IAS 19 / IAS 37 - termination benefits, recognition point for a voluntary redundancy offer

Under IAS 19, termination benefits are recognised at the earlier of when the entity can no longer withdraw the offer and when it recognises related restructuring costs under IAS 37. For an offer made to encourage voluntary redundancy, the entity can no longer withdraw it once an employee accepts, unless a legal or contractual restriction applies earlier. With neither a restriction nor a restructuring plan, the liability at the year end covers only the 35 acceptances, or CU 1,400,000. Expected future acceptances (CU 2,400,000) and the whole workforce (CU 4,000,000) do not yet bind the entity, and waiting for the period to close would ignore the acceptances already received.

156. At 31 December an entity recognises a remediation provision payable in three instalments of CU 1,000,000, due 9 months, 21 months and 33 months after the reporting date, discounted at 8% a year using each instalment's own timing, giving present values of CU 943,913, CU 873,994 and CU 809,254 respectively. What amounts are presented as current and non-current provisions in the statement of financial position?

A) Current CU 1,000,000 and non-current CU 1,627,161, because the amount due within 12 months is shown at its undiscounted cash value with the discounting effect assigned to later instalments
B) Current CU 925,926 and non-current CU 1,701,235, because the first instalment is discounted over a full 12 months to simplify the split between current and non-current
C) Current CU 2,627,161 and non-current nil, because one instalment is due within 12 months and the whole provision is therefore classified as current under IAS 1
D) Current CU 943,913 (the present value of the instalment due within 12 months) and non-current CU 1,683,248, giving a total provision of CU 2,627,161

Correct: D difficult IAS 1 / IAS 37 - current and non-current classification of a discounted provision paid in instalments

A provision is classified as current to the extent it is due for settlement within 12 months, and the remainder is non-current. Each instalment is discounted over its own period: the first instalment's present value of CU 943,913 is current, and 873,994 + 809,254 = CU 1,683,248 is non-current, a total of CU 2,627,161. Classifying everything as current overstates current liabilities, using the undiscounted CU 1,000,000 overstates the current figure, and a full-year discount factor distorts the split.

157. An entity's warranty provision at the start of the year was CU 640,000. During the year it charged CU 520,000 of new provisions, used CU 410,000 against warranty claims actually met, reversed CU 70,000 of amounts no longer needed, and recognised CU 18,000 of discount unwinding on the long-term portion. What are the closing provision and the total charge to profit or loss in respect of it?

A) Closing provision CU 838,000; profit or loss charge CU 608,000, because the reversal of CU 70,000 of unused amounts is added to the provision and also charged to expense
B) Closing provision CU 698,000; profit or loss charge CU 468,000, made up of CU 450,000 within operating costs (520,000 less 70,000) and CU 18,000 as finance cost
C) Closing provision CU 698,000; profit or loss charge CU 878,000, because the CU 410,000 of claims met is expensed in addition to the new provisions and unwinding recognised
D) Closing provision CU 680,000; profit or loss charge CU 450,000, because the unwinding of the discount increases the related asset's cost and does not pass through finance costs

Correct: B difficult IAS 37 - reconciliation of the carrying amount of a provision, additions, utilisation, reversal and unwinding

The provision moves as follows: 640,000 + 520,000 additions - 410,000 used - 70,000 reversed + 18,000 unwinding = CU 698,000. Profit or loss bears additions net of unused amounts reversed (CU 450,000) plus unwinding as a borrowing cost (CU 18,000), a total of CU 468,000. Amounts used are already provided for, so charging them again double counts. Unused reversals reduce the provision and the charge, and unwinding is a finance cost, not an adjustment to asset cost.

158. An entity holds a CU 900,000 restructuring provision for redundancy and lease-cancellation costs. The programme completes with CU 700,000 of redundancy payments and CU 120,000 of lease-cancellation costs, plus CU 150,000 spent retraining continuing staff, which was not part of the original provision. How should the provision and these costs be accounted for?

A) The provision is utilised for CU 820,000, the unused CU 80,000 is reversed to profit or loss, and the CU 150,000 of retraining is expensed as incurred
B) The provision is utilised for CU 970,000 including the retraining, and the CU 70,000 excess over the provision is charged to profit or loss, with nothing reversed
C) The provision is utilised for CU 900,000 in full by applying the unused CU 80,000 against retraining, and the remaining CU 70,000 of retraining is expensed as incurred
D) The provision is utilised for CU 820,000 and the unused CU 80,000 is retained in the provision to absorb the retraining costs, with CU 70,000 of retraining expensed

Correct: A difficult IAS 37 - use of provisions only for the purpose originally recognised and reversal of unused amounts

A provision may be used only for expenditures for which it was originally recognised, and any unused balance must be reversed when it is no longer probable that an outflow will be needed. Here CU 820,000 of costs fall within the provision and the CU 80,000 balance is reversed to profit or loss, while the retraining of continuing staff is an ordinary operating cost expensed as incurred. Setting unrelated costs against the provision would let one provision cushion costs that were never provided for.

159. An entity's restructuring plan, announced and started before the year end, will cost CU 2,500,000 in qualifying termination and lease costs. As part of the plan the entity expects to sell a building with a carrying amount of CU 3,000,000 for about CU 4,200,000, but no sale agreement has been signed and the building is not yet classified as held for sale. What provision and gain are recognised at the year end?

A) A provision of CU 1,300,000 is recognised, being the qualifying costs net of the CU 1,200,000 expected gain, because the sale forms part of the same restructuring plan
B) A provision of CU 2,500,000 is recognised and the CU 1,200,000 expected gain is recognised in profit or loss now, because the sale is highly probable and the plan has started
C) A provision of CU 2,500,000 is recognised and the building is revalued up to CU 4,200,000 now, with the CU 1,200,000 credited to a revaluation reserve until the sale completes
D) A provision of CU 2,500,000 is recognised in full and the expected CU 1,200,000 gain is not recognised until the sale actually occurs, when it is accounted for under the disposal rules

Correct: D difficult IAS 37 - expected gains on disposal of assets excluded from the measurement of a provision

In measuring a provision, gains from the expected disposal of assets are not taken into account, even if the disposal is closely linked to the event giving rise to the provision. Such a gain is recognised only when the disposal occurs, under the standard dealing with the asset. The provision therefore remains CU 2,500,000. Netting the gain understates the obligation, recognising it early is premature without a binding sale, and revaluing a building held under the cost model is not permitted by a plan to sell it.

160. A bus operator carries no external insurance for passenger injuries. During the year 12 accidents occurred. Only three claims have been filed so far; they are expected to settle for CU 650,000, of which CU 350,000 has been paid. Claims are normally filed up to two years after an accident, and the operator's actuary estimates that settlements for all 12 of the year's accidents will total CU 1,800,000 (discounting is immaterial). What provision is recognised at the year end?

A) Nil, with a contingent liability disclosed, because the operator chose not to insure and the decision to self-insure does not by itself create an obligation for any individual claim, and the actuarial estimate is disclosed in the notes
B) CU 300,000, being the unpaid balance of the three filed claims, because a present obligation exists only once a claim has been formally lodged against the operator
C) CU 1,450,000, being the actuarial total of CU 1,800,000 less the CU 350,000 already paid, because each accident is a past event creating an obligation whether or not a claim has yet been filed
D) CU 1,800,000, being the full actuarial estimate, because amounts already paid on settled claims still form part of the provision until the claims are formally closed

Correct: C difficult IAS 37 - present obligation from past accidents for incurred but unreported claims under self-insurance

The obligating event is each accident, not the filing of a claim: where events have already occurred, a provision is recognised for the best estimate of the cost of claims still to be settled, including those not yet reported. The best estimate is the CU 1,800,000 actuarial total less the CU 350,000 already paid, or CU 1,450,000. Limiting the provision to filed claims ignores incurred but unreported claims, and a pure decision to self-insure would create no obligation, but here accidents have actually occurred. Amounts paid are no longer owed, so they are not included.

161. At 31 December 20X6 an entity provided CU 400,000 for a breach-of-contract claim arising from events in October 20X6. On 18 February 20X7, before the financial statements were authorised on 10 March 20X7, the court ordered it to pay damages of CU 480,000 plus the claimant's costs of CU 40,000. The entity expects to incur a further CU 25,000 of its own legal fees on an appeal after the year end. How is this reflected in the 20X6 financial statements?

A) The provision stays at CU 400,000 and the CU 120,000 shortfall is charged in 20X7, with the judgment disclosed as a non-adjusting event because it occurred after the reporting date, and the claimant's costs are recognised only when they are paid
B) The provision is increased to CU 520,000 at 31 December 20X6, an additional CU 120,000 charge in 20X6, as an adjusting event, while the CU 25,000 of own legal fees is expensed in 20X7 as the services are received
C) The provision is increased to CU 520,000 but the CU 120,000 is charged in 20X7 profit or loss, because the court order, not the year-end position, creates the obligation
D) The provision is increased to CU 545,000 at 31 December 20X6, including the CU 25,000 of own legal fees, because all costs linked to the claim are part of the best estimate

Correct: B difficult IAS 10 / IAS 37 - court judgment after the reporting period as an adjusting event, own future legal costs excluded

A judgment after the reporting date that confirms the entity had a present obligation at the reporting date is an adjusting event, so the provision is updated to the CU 520,000 payable (damages CU 480,000 and the claimant's costs CU 40,000), with the extra CU 120,000 charged in 20X6. The entity's own future legal fees relate to services not yet received and are recognised as incurred, so including CU 25,000 would be wrong. Treating the order as non-adjusting, or pushing the charge into 20X7, ignores that the underlying conditions existed at the reporting date.

162. An entity must decommission a plant in 10 years. The estimated cost at today's prices is CU 5,000,000, inflation is expected at 4% a year, and the appropriate pre-tax nominal discount rate is 9% a year (1.09 to the power of 10 is 2.3674). Which amount is the correct decommissioning provision to recognise now, applying consistent assumptions?

A) About CU 3,126,356, found by inflating the cost to CU 7,401,221 and discounting at the nominal 9%, which equals discounting the real cost at the implied real rate of about 4.81%
B) About CU 4,627,770, found by discounting the inflated cash flows of CU 7,401,221 at the implied real rate of 4.81%, which understates the discounting effect of the nominal rate, an error that overstates the provision
C) About CU 2,112,054, found by discounting the cost at today's prices of CU 5,000,000 at the nominal 9% rate without inflating the expected cash flows to future prices
D) About CU 7,401,221, being the inflated cash flow undiscounted, because inflation and the time value of money offset each other when both are expected to occur

Correct: A difficult IAS 37 - consistency of inflation assumptions between estimated cash flows and the discount rate

Estimated cash flows and the discount rate must be consistent: nominal (inflated) cash flows are discounted at a nominal rate, or real cash flows at a real rate. Inflating CU 5,000,000 at 4% for 10 years gives CU 7,401,221, and dividing by 2.3674 gives about CU 3,126,356, which equals CU 5,000,000 discounted at the real rate of 1.09/1.04 - 1. Mixing real cash flows with a nominal rate (CU 2,112,054) or nominal cash flows with a real rate (CU 4,627,770) double counts or omits inflation, and leaving the amount undiscounted ignores that time value is material over 10 years.

163. A contractor has a fixed-price contract with CU 2,000,000 of revenue still to be earned and CU 2,100,000 of cash costs still to be incurred. A machine dedicated to the contract has a carrying amount of CU 400,000 but a recoverable amount of only CU 100,000, and its depreciation over the remaining contract, on the carrying amount after any impairment, is part of the cost of fulfilling it. What amounts are recognised for impairment and for the onerous contract provision?

A) An impairment loss of CU 300,000 and a provision of CU 500,000, giving a total charge of CU 800,000, because the provision is measured on the full contract loss before the impairment
B) An impairment loss of CU 300,000 is recognised first, then a provision of CU 200,000 (2,100,000 cash costs plus 100,000 depreciation less 2,000,000 revenue), a total charge of CU 500,000
C) No impairment loss and a provision of CU 500,000, because the dedicated machine's decline in value is absorbed within the onerous contract provision rather than tested separately
D) An impairment loss of CU 300,000 and a provision of CU 100,000, because only the excess of cash costs over revenue is unavoidable and depreciation is never part of contract costs

Correct: B difficult IAS 37 / IAS 36 - impairment of dedicated assets before recognising an onerous contract provision

Before establishing a separate provision for an onerous contract, an entity recognises any impairment loss on assets dedicated to that contract. The machine is written down by CU 300,000 (400,000 less 100,000). The cost of fulfilling the contract then includes cash costs of CU 2,100,000 and depreciation of the impaired machine of CU 100,000, less revenue of CU 2,000,000, giving a provision of CU 200,000. The total economic loss of CU 500,000 is recognised once, and the other options either double count or omit part of the cost of fulfilment.

164. Legislation requires producers of household electrical equipment to fund the disposal of historical equipment sold before 2005, in proportion to each producer's share of the market in a legislated measurement period, the calendar year 20X6. An entity (year end 31 December 20X6) held a 12% market share throughout 20X6. The scheme administrator will assess the total cost of CU 7,500,000 and invoice producers in March 20X7. What liability is recognised at 31 December 20X6?

A) No liability, because the obligating event is the original sale of the historical equipment before 2005 and the entity cannot be assumed to have made those sales
B) No liability until March 20X7, because the obligation arises only when the scheme administrator issues its invoice for the assessed share of the costs
C) A liability of CU 900,000 (12% x CU 7,500,000), because participating in the market during the measurement period is the obligating event, whether or not the entity sold the historical equipment
D) A liability for the share of the total cost based on the entity's historical sales before 2005, because the legislation is ultimately aimed at the producers of the original equipment

Correct: C difficult IFRIC 6 / IAS 37 - liability for historical waste equipment arising from market participation in the measurement period

Under the interpretation covering waste electrical and electronic equipment, the obligating event for historical waste management costs is participation in the market during the measurement period. The entity participated throughout 20X6, so a liability exists at the year end, measured at its best estimate of 12% x CU 7,500,000 = CU 900,000. The original manufacture or sale, and the later invoice, are not the obligating event, and the allocation is by current market share rather than historical sales.

165. An entity must decommission a mine at a cost it estimates at CU 12,000,000 (present value) and contributes to an external fund managed by trustees, which it neither controls nor significantly influences. The fund reimburses decommissioning costs, and the entity's share of the fund's fair value of net assets is CU 9,000,000. How does the entity account for the obligation and the fund interest at the reporting date?

A) It recognises the CU 12,000,000 obligation and a CU 12,000,000 asset, because the fund is expected to settle the entire obligation and the asset is therefore measured at the obligation amount
B) It recognises a net liability of CU 3,000,000 only, because the fund will meet the costs, and offsetting the fund interest against the obligation is required in the statement of financial position
C) It recognises a liability of CU 9,000,000 only, because the entity's obligation is limited to the amount of the fund's net assets available to fund the decommissioning work
D) It recognises the CU 12,000,000 obligation gross and a separate reimbursement right of CU 9,000,000, the lower of the obligation and its share of the fund's net assets, without netting the two

Correct: D difficult IFRIC 5 / IAS 37 - right to reimbursement from a decommissioning fund measured at the lower of obligation and share of fund net assets

Where an entity contributes to an external decommissioning fund it does not control, its right to reimbursement is recognised as a separate asset, measured at the lower of the amount of the decommissioning obligation recognised and the entity's share of the fair value of the fund's net assets. Here that is CU 9,000,000, against a gross obligation of CU 12,000,000. The two are not netted. Recognising only a net liability, limiting the obligation to fund assets, or measuring the right at the full obligation all ignore the measurement rule.

166. An entity sells goods for CU 1,000,000 (cost CU 600,000) on terms allowing customers to return them within 30 days for a full refund. Experience shows 8% of sales are returned, and returned goods can be resold at cost. All the goods are sold on the last day of the year. How should the sales be recorded?

A) Revenue CU 920,000, a refund liability of CU 80,000 and cost of sales CU 600,000, with no asset recognised, because returned goods are not recognised until physically received
B) Revenue CU 1,000,000 with an IAS 37 provision of CU 80,000 charged to expenses, because expected returns are an uncertain liability of uncertain timing and amount
C) Revenue CU 920,000, a refund liability of CU 80,000, a right-to-recover asset of CU 48,000 and cost of sales CU 552,000, with no IAS 37 provision
D) Revenue CU 920,000, cost of sales CU 552,000 and a net provision of CU 32,000 for returns, because the refund liability and the right to recover goods are offset

Correct: C difficult IFRS 15 / IAS 37 - refund liability and right-to-recover asset for sales with a right of return, scope exclusion from IAS 37

Where goods are sold with a right of return, IFRS 15 requires revenue only for the goods expected to be kept (CU 920,000), a refund liability for the consideration expected to be refunded (CU 80,000), and an asset for the right to recover the products (8% x CU 600,000 = CU 48,000) that reduces cost of sales to CU 552,000. This is an IFRS 15 refund liability, outside IAS 37. The asset and liability are presented separately, and charging the refund as an expense or omitting the return asset misstates revenue and cost of sales.

167. An entity recognises a decommissioning provision of CU 800,000 and capitalises the same amount as part of the cost of the related asset. Tax deductions are given only when the costs are paid, so the tax base of the provision is nil, and the tax base of the capitalised asset component is also nil. The tax rate is 30%, and taxable profits will be available. How is deferred tax accounted for on initial recognition?

A) Neither is recognised, because the initial recognition exemption prevents recognising deferred tax on a transaction affecting neither accounting nor taxable profit
B) Only the deferred tax asset of CU 240,000 is recognised, with a credit to profit or loss, because the provision creates a deductible temporary difference that will reverse on payment
C) A deferred tax asset of CU 240,000 on the provision and a deferred tax liability of CU 240,000 on the asset are both recognised separately, with no net effect on profit or loss
D) A deferred tax asset of CU 240,000 is recognised and deducted from the asset's cost, reducing its carrying amount to CU 560,000, to avoid any deferred tax liability being recognised

Correct: C difficult IAS 12 / IAS 37 - deferred tax on decommissioning provisions and related assets, scope of the initial recognition exemption

The provision creates a deductible temporary difference of CU 800,000 (deferred tax asset of 30% x 800,000 = CU 240,000) and the asset component creates a taxable temporary difference of CU 800,000 (deferred tax liability of CU 240,000). Since the amendment to IAS 12, the initial recognition exemption does not apply to transactions that give rise to equal taxable and deductible temporary differences, so both are recognised and net to nil. Recognising only the asset would credit profit, and reducing the asset's cost is not permitted.

168. An entity claimed a deduction that the tax authority may challenge. If it is challenged, the extra tax payable could be nil (50% probability), CU 60,000 (30%) or CU 100,000 (20%). The entity concludes that the expected value method best predicts the resolution. What liability does it recognise for the uncertainty?

A) CU 100,000, because the highest of the possible amounts is used so that the tax liability is not understated
B) CU 160,000, because every possible additional assessment is added together to reach the total exposure to tax
C) Nil, because the most likely single outcome is that the deduction is accepted and that has a probability of 50%
D) CU 38,000, the sum of each possible extra tax amount multiplied by its probability of being assessed by the tax body

Correct: D difficult IFRIC 23.9-11, IAS 12.46

IFRIC 23.11 requires the entity to use the method, most likely amount or expected value, that better predicts the resolution of the uncertainty. With several possible outcomes the expected value is appropriate: 0.5 x 0 + 0.3 x 60,000 + 0.2 x 100,000 = CU 38,000. Taking the most likely amount ignores the 50% chance of a payment, and adding or maximising the outcomes does not reflect probabilities.

169. Which one of the following is a provision within the scope of IAS 37, rather than an accrual presented within trade and other payables?

A) CU 45,000 for the expected cost of repairs on goods sold under warranty, where neither claim numbers nor timing are known
B) CU 18,000 for electricity used in the final month, where the meter reading is known but the supplier's bill has not arrived
C) CU 12,000 for interest accrued on a bank loan, calculated from the contract rate and the number of days since the last payment
D) CU 30,000 for the annual audit fee, where the amount is set in an engagement letter and the invoice is issued after the year end

Correct: A difficult IAS 37.10-11

IAS 37.11 distinguishes provisions from accruals: provisions are liabilities of uncertain timing or amount, while accruals are liabilities to pay for goods or services that have been received but not yet invoiced, where the uncertainty is much less. Electricity used, an audit fee fixed in an engagement letter and loan interest by formula are all determinable, so they are accruals. Warranty repairs depend on uncertain future claims, so the CU 45,000 is a provision.

170. An entity must deliver 10,000 units at CU 50 each, with selling costs of CU 2 a unit. It holds 4,000 units costing CU 55 and must buy the other 6,000 at CU 53. Cancelling would cost a penalty of CU 40,000. What does it recognise?

A) A provision of CU 58,000 for the total loss on the contract, with the 4,000 units held in inventory left at cost of CU 55
B) An inventory write-down of CU 28,000 and an onerous contract provision of CU 30,000, which is lower than the exit penalty
C) An inventory write-down of CU 28,000 and a provision of CU 40,000, because the penalty is the cost of exiting the contract
D) A provision of CU 30,000 only, because the inventory already held is a sunk cost and is not part of the contract loss

Correct: B difficult IAS 37.66-69, IAS 2.28-33

IAS 37.69 requires assets dedicated to the contract to be impaired first; for inventory that is IAS 2. NRV is 50 - 2 = CU 48, so 4,000 x (55 - 48) = CU 28,000 is written off. For the 6,000 units still to be bought, the cost to fulfil is 53 + 2 = CU 55 against revenue of CU 50, a loss of 5 x 6,000 = CU 30,000, lower than the CU 40,000 penalty, so the provision is CU 30,000 (IAS 37.68).

171. In a business combination the acquiree has a lawsuit with a fair value of CU 400,000 as a contingent liability at the acquisition date. The seller contractually indemnifies the acquirer for 100% of any loss and collection is not in doubt. What is the effect on goodwill?

A) Nil, because the CU 400,000 liability is offset by a CU 400,000 indemnification asset recognised at the acquisition date
B) Goodwill falls by CU 400,000, because the indemnified loss is treated as a reduction of the consideration transferred
C) Goodwill rises by CU 400,000, because the indemnity is recorded as income in profit or loss after the acquisition date
D) Goodwill rises by CU 400,000, because the liability is recognised but the indemnity is only a contingent asset that is ignored

Correct: A difficult IFRS 3.23, 3.27-28, IAS 37.27

IFRS 3.23 requires a contingent liability to be recognised at fair value if it is a present obligation that can be measured reliably, here CU 400,000. IFRS 3.27 requires an indemnification asset to be recognised at the same time and on the same basis, subject to collectability. The two amounts offset, so net assets acquired and goodwill are unchanged.

172. An entity acquires a company on 1 July. At that date it intends to close the acquiree's factory at a cost of CU 250,000 but announces nothing until 15 September. The acquiree had no obligation to restructure on 1 July. How is the cost treated?

A) It is deducted from the consideration transferred, which reduces goodwill by CU 250,000 and avoids a charge to profit or loss
B) It is charged directly to equity on 1 July, because the cost arises from a transaction with the former owners of the acquiree
C) It is excluded from the acquisition accounting and recognised afterwards when the IAS 37 restructuring criteria are met
D) It is a liability assumed at 1 July, which increases goodwill by CU 250,000 because the closure was intended at that date

Correct: C difficult IFRS 3.11, 3.B31-B32, IAS 37.70-72

Only liabilities of the acquiree that exist at the acquisition date are recognised in acquisition accounting. An acquirer's plan to restructure the acquiree is not an obligation of the acquiree on that date (IFRS 3.11 and 3.B31-B32). The CU 250,000 is a post-combination cost, recognised in profit or loss when the entity has a detailed formal plan and has raised a valid expectation in those affected, that is, on 15 September (IAS 37.72).

173. A plant is carried under the revaluation model with a credit balance in its revaluation surplus of CU 60,000. A fall in the discount rate raises its decommissioning provision by CU 90,000. How is the increase accounted for?

A) The whole CU 90,000 is charged to profit or loss immediately, as the revaluation model ignores changes in liabilities
B) The whole CU 90,000 is debited to the revaluation surplus, leaving a debit balance of CU 30,000 in that reserve
C) CU 60,000 is debited to the revaluation surplus and the remaining CU 30,000 is charged to profit or loss at once
D) The whole CU 90,000 is added to the cost of the plant and then depreciated over the plant's remaining useful life

Correct: C difficult IFRIC 1.5-6, IAS 16.39-40

IFRIC 1.6 treats a change in the liability for a revalued asset differently from one carried at cost. An increase in the liability is recognised in profit or loss, except that it is debited to other comprehensive income to the extent of any credit balance in the revaluation surplus for that asset. Here CU 60,000 goes to the surplus and the balance of CU 30,000 to profit or loss, and the asset is revalued again when it is next revalued.

174. A provision rose from CU 300,000 to CU 380,000 in the year, made up of new provisions of CU 130,000 charged in operating profit, unwinding of CU 20,000 in finance costs and CU 70,000 of cash utilisation. What is the working capital adjustment for provisions, excluding the finance cost add-back?

A) A deduction of CU 70,000, being the cash used against the provision during the year with new provisions ignored
B) An addition of CU 60,000, being the new provisions of CU 130,000 less the CU 70,000 paid in cash during the year
C) An addition of CU 130,000, being the new provisions charged to operating profit with no deduction for cash paid
D) An addition of CU 80,000, being the whole movement in the balance, which includes the unwinding added back separately

Correct: B difficult IAS 7.18-20, IAS 37.84

Operating profit was reduced by new provisions of CU 130,000 that were not paid in cash, but cash of CU 70,000 was paid out of the provision, so the net non-cash charge is 130,000 - 70,000 = CU 60,000, added back. The CU 20,000 unwinding is a finance cost, added back (or excluded) separately. Check: 300,000 + 130,000 + 20,000 - 70,000 = 380,000. Using the whole CU 80,000 movement would count the unwinding twice.

175. An entity's provision note shows the warranty provision moving from CU 120,000 at the start of the year to CU 140,000 at the end, after additions of CU 90,000, amounts used of CU 60,000 and unused amounts reversed of CU 10,000. Must the note also show the same reconciliation for the prior year?

A) Yes, but only for the additions and the amounts used, which are flows, and not for the closing carrying amount of the provision
B) Yes, because a missing comparative reconciliation would be a prior period error that has to be corrected under IAS 8
C) Yes, because IAS 1 requires comparative numerical information for every disclosure unless a Standard says otherwise in all cases
D) No, because IAS 37 states that comparative information is not required for the reconciliation of the carrying amount

Correct: D difficult IAS 37.84, IAS 1.38

IAS 37.84 requires a reconciliation of the carrying amount at the start and end of the period, showing additions, amounts used, unused amounts reversed and the unwinding of the discount, and then says expressly that comparative information is not required. This is an exception to the general comparative requirement in IAS 1.38. The prior-year closing balance still appears in the statement of financial position.