176. A lessee leases an aircraft for five years or 15,000 flight hours and must pay CU 1,800,000 at the end to return it in the contracted condition. The cost arises from flying. After 2.5 years the aircraft has flown 5,000 hours. Ignoring discounting, what provision is required?

A) CU 900,000, being half of the CU 1,800,000 because half of the five-year lease term has gone by at the reporting date
B) Nil, because the lessee could avoid the return cost by negotiating to buy the aircraft at the end of the lease term
C) CU 1,800,000, because the lessee has a present obligation for the whole return cost from the day the lease starts
D) CU 600,000, being CU 120 per flight hour multiplied by the 5,000 hours flown so far during the term of the lease

Correct: D difficult IAS 37.14, 37.19-20, IFRS 16.24(d)

The obligating event is the use of the aircraft, which causes the condition that must be repaired. The obligation therefore accumulates with usage: 1,800,000 / 15,000 = CU 120 per hour, so after 5,000 hours the provision is CU 600,000. Time-based accrual would give CU 900,000 and would not match the event that causes the cost. The full CU 1,800,000 is not owed at the start because the aircraft has not yet been used (IAS 37.19-20).

177. An entity must remediate a site. Its engineers' best estimate of the cost is CU 800,000, within a range of CU 700,000 to CU 1,000,000. The board wants to recognise CU 1,000,000 'to be prudent'. What amount does IAS 37 require?

A) CU 800,000, the best estimate, with caution used in judgement but without deliberate overstatement of the provision
B) CU 1,000,000, the top of the range, because uncertainty requires the maximum cost so that the liability is never understated
C) CU 850,000, the midpoint of the range of CU 700,000 to CU 1,000,000 because the actual cost could land anywhere in it
D) CU 900,000, the best estimate plus a CU 100,000 margin for contingencies that is included as a general cushion

Correct: A difficult IAS 37.36, 37.39, 37.43

A provision is the best estimate of the expenditure to settle the obligation (IAS 37.36). Uncertainty calls for caution in judgement, but IAS 37.43 says this does not justify creating excessive provisions or a deliberate overstatement of liabilities. Because CU 800,000 is the most likely cost, the midpoint rule, which applies only when all outcomes in a continuous range are equally likely (IAS 37.39), is not applicable.

178. A manufacturer must repair 200 defective units free of charge using its own technicians. The repair costs CU 150 a unit (CU 90 parts and CU 60 labour). It would charge CU 220 a unit for the same work and a new unit sells for CU 300. What provision is recognised?

A) CU 18,000, being 200 units at the CU 90 cost of parts, because internal labour is paid for in any event
B) CU 44,000, being 200 units at the CU 220 that the entity would normally charge a customer for the repair work
C) CU 30,000, being 200 units at CU 150, the cost to the entity of parts and labour for repairing each one
D) CU 60,000, being 200 units at the CU 300 selling price, as if the units would be replaced with new ones

Correct: C difficult IAS 37.36-37, 37.45

A provision is the best estimate of the expenditure required to settle the present obligation (IAS 37.36). When the entity settles by repairing, the expenditure is its own cost of repair. That is CU 150 a unit including attributable labour, giving 200 x 150 = CU 30,000. A margin that the entity would earn on the work is not an outflow, and replacing with new units is not the obligation.

179. An entity expects to pay CU 1,000,000 to settle a claim. There is a 50% chance that settlement will be in two years and a 50% chance that it will be in four years. The pre-tax discount rate is 5%. What provision is recognised?

A) CU 822,702, being CU 1,000,000 discounted for four years because the latest settlement date is the longer period
B) CU 864,866, being each possible date's present value weighted at 50%, which is 453,515 plus 411,351
C) CU 863,838, being CU 1,000,000 discounted for the expected settlement period of three years at 5%
D) CU 907,029, being CU 1,000,000 discounted for two years because the earliest date is the prudent choice

Correct: B difficult IAS 37.36-39, 37.45

Where the amount is uncertain in timing, the best estimate reflects each outcome with its probability: 0.5 x 1,000,000 / 1.05^2 + 0.5 x 1,000,000 / 1.05^4 = 453,515 + 411,351 = CU 864,866. Discounting at the average date of three years gives CU 863,838, which differs because discounting is not linear in time, and the earliest or latest date alone ignores half of the outcomes.

180. An entity has a three-year fixed-price contract that will lose CU 50,000 a year. It expects the customer to renew for two further years at market prices, which would earn a profit of CU 120,000, but neither party is obliged to renew. What provision is recognised for the onerous contract?

A) Nil, because the contract and its expected renewals are profitable when taken together over a five-year period
B) CU 150,000, being the unavoidable losses of CU 50,000 for each of the three years for which the contract binds it
C) CU 30,000, being the CU 150,000 loss over the contract less the CU 120,000 profit expected from the two renewal years
D) CU 50,000, being the loss for one year only because the entity could negotiate better terms before the second year

Correct: B difficult IAS 37.66-68, 37.63

A contract is onerous when the unavoidable costs of meeting its obligations exceed the economic benefits expected under it (IAS 37.68). Only rights and obligations in the contract count. A renewal is a separate, uncommitted future contract, so its expected profit is not a benefit under this contract and cannot reduce the loss. The provision is 3 x 50,000 = CU 150,000.

181. An entity received a CU 500,000 grant for staff training and credited it to deferred income, releasing it to income over five years. After conditions are breached it must repay CU 200,000 when the unreleased deferred income is CU 150,000. How is the repayment recorded?

A) The whole CU 200,000 is charged against retained earnings, because the grant income was recognised in earlier periods
B) The whole CU 200,000 is treated as a prior period error and the prior years' reported income is restated
C) CU 150,000 is debited to the deferred income and the balance of CU 50,000 is expensed in profit or loss immediately
D) The whole CU 200,000 is charged to profit or loss immediately, with the deferred income balance left unchanged

Correct: C difficult IAS 20.32, IAS 8.32-36

IAS 20.32 says a grant that becomes repayable is accounted for as a change in accounting estimate (IAS 8). Repayment of a grant related to income is applied first against any unamortised deferred credit; any excess is recognised immediately in profit or loss. So CU 150,000 reduces deferred income and CU 50,000 is expensed. No restatement is made, because the repayment results from a later event (the breach).

182. An entity recognised a provision of CU 90,000 at the end of Year 0 for a three-year contract expected to lose CU 30,000 each year. In Year 1 the contract's revenue less costs was a loss of CU 30,000, as expected. Ignoring discounting, what is the effect on Year 1 profit and the closing provision?

A) The loss is offset by utilising the provision, so Year 1 profit is unchanged and the closing provision is CU 60,000
B) Year 1 profit falls by CU 30,000 and the provision stays at CU 90,000, because the loss arises in the period
C) Year 1 profit falls by CU 30,000 and the provision falls to CU 60,000, which counts the loss in profit twice
D) Year 1 profit rises by CU 30,000 and the provision rises to CU 120,000, because the loss is deferred to later years

Correct: A difficult IAS 37.61, 37.66, 37.84(a)

The full expected loss of CU 90,000 was charged to profit in Year 0 when the provision was set up. In Year 1 the actual loss of CU 30,000 is a cost that the provision was created to cover, so the provision is utilised (Dr provision 30,000) against it. The loss in the income statement and the utilisation net to nil, and the provision falls to 90,000 - 30,000 = CU 60,000. Charging the loss again would double count it.

183. A quarry plant was fully depreciated several years ago and has a carrying amount of nil, but it must still be removed in three years. The decommissioning provision at the start of the year was CU 900,000, unwound at a fixed 8%. At the year end the estimated outflow is raised, increasing the provision by a further CU 150,000. What is charged to profit or loss for the year in respect of the provision?

A) CU 1,122,000, being the whole closing provision, because the opening balance is expensed again when the estimate is revised
B) CU 222,000, being CU 72,000 of unwinding plus the CU 150,000 revision, as nothing can be capitalised on a fully depreciated plant
C) CU 72,000, being the unwinding only, because the CU 150,000 revision is added to the cost of the plant within the non-current assets
D) CU 150,000, being the revision only, because the unwinding of the discount is capitalised while the plant awaits removal

Correct: B difficult IFRIC 1.5-7

IFRIC 1 adds changes in a decommissioning liability to the cost of the related asset, but the adjusted depreciable amount is depreciated over the remaining useful life, so once the asset has reached the end of its useful life all later changes go straight to profit or loss as they occur. Here unwinding is 900,000 x 8% = CU 72,000 (a finance cost under IAS 37.60) and the revision adds CU 150,000, giving a charge of CU 222,000 and a closing provision of CU 1,122,000. Capitalising the revision would put an asset on the statement of financial position with no future benefit and nothing to depreciate it against.

184. The assets of a cash-generating unit have a carrying amount of CU 8,400,000. A decommissioning provision of CU 1,100,000 is recognised for the unit. The unit's value in use is CU 7,000,000, calculated from cash flows that exclude the decommissioning outflows, and fair value less costs of disposal is lower. What impairment loss is recognised?

A) CU 2,500,000, because the provision is also deducted from the value in use, giving CU 5,900,000 against the CU 8,400,000 carrying amount
B) CU 1,400,000, because the CU 8,400,000 carrying amount is compared directly with the CU 7,000,000 value in use, ignoring the provision
C) CU 300,000, because the carrying amount is CU 7,300,000 (8,400,000 less the provision) against a recoverable amount of CU 7,000,000
D) CU 1,100,000, because the whole provision is treated as the shortfall in recoverable amount and charged as an impairment loss

Correct: C complex IAS 36.76-79

Where the recoverable amount of a unit excludes the cash outflows for a recognised liability, IAS 36 requires the carrying amount to be reduced by that liability so the two are measured on a consistent basis. The comparison is therefore 8,400,000 - 1,100,000 = CU 7,300,000 against a value in use of CU 7,000,000, an impairment of CU 300,000. Ignoring the provision overstates the loss by CU 1,100,000, and deducting it from the value in use as well counts the liability twice.

185. A lessee that applies IFRS 16 vacates premises with four years of the lease left. The lease liability is CU 700,000 and the right-of-use asset is CU 640,000. The lease is neither short-term nor of low value. The premises can be sublet, and the present value of net sublease income is CU 450,000, which is the recoverable amount of the right-of-use asset. What is recognised?

A) An impairment loss of CU 190,000 on the right-of-use asset plus an IAS 37 provision of CU 250,000 for the net unavoidable cost of the lease
B) An onerous lease provision of CU 250,000 under IAS 37, being the lease liability of CU 700,000 less the sublease income of CU 450,000
C) An impairment loss of CU 190,000 on the right-of-use asset under IAS 36, with the lease liability unchanged and no IAS 37 onerous provision
D) No adjustment, because the lease liability is still measured at amortised cost and the asset is tested only when the premises are disposed of

Correct: C complex IFRS 16.33, IAS 36

Under IFRS 16 the lessee already carries the lease payments as a liability, so no separate onerous lease provision is made for a lease within the standard. Instead IFRS 16 requires the right-of-use asset to be tested under IAS 36: carrying amount 640,000 less recoverable amount 450,000 gives an impairment loss of CU 190,000, while the liability stays at CU 700,000. The IAS 37 provision of CU 250,000 would count the same lease payments twice, and waiting for disposal ignores the impairment indicator created by vacating the premises.

186. An entity must restore a quarry in 10 years. The cost using present technology is CU 4,000,000 in future money, and the 10-year discount factor at the pre-tax rate is 0.5584. Management hopes a new method will cut the cost by 40%. Independent engineers, using evidence from sites where the method is already in commercial use, reasonably expect a 25% saving by then. What provision is recognised?

A) CU 1,340,160, being CU 2,400,000 discounted at 0.5584, because management's own 40% saving is the best estimate of the clean-up cost
B) CU 2,233,600, being CU 4,000,000 discounted at 0.5584, because any saving from future technology must be excluded to remain prudent
C) CU 3,000,000, being the cost less the expected 25% saving, left undiscounted because the exact timing of the clean-up is uncertain
D) CU 1,675,200, being CU 3,000,000 (the cost less the 25% saving the objective observers expect) discounted at 0.5584 over ten years

Correct: D complex IAS 37.49-50

IAS 37 says the amount recognised reflects the reasonable expectation of technically qualified, objective observers, taking account of all available evidence about the technology that will be available at the time of clean-up. The engineers' 25% is supported by evidence, so the cash flow is 4,000,000 x 0.75 = CU 3,000,000 and the provision is 3,000,000 x 0.5584 = CU 1,675,200. Ignoring the saving is not permitted prudence, and management's 40% is a hope rather than objective evidence. Discounting is required because the time value of money is material over ten years.

187. Property, plant and equipment rose from CU 5,400,000 to CU 6,100,000. Depreciation was CU 850,000 and assets with a carrying amount of CU 300,000 were disposed of. There were no revaluations or impairments. Additions include CU 220,000 capitalised for a new decommissioning provision, and payables for capital purchases rose from CU 60,000 to CU 190,000. What is the cash paid for property, plant and equipment in investing activities?

A) CU 1,720,000, being additions of CU 1,850,000 less the rise in capital payables only, treating the decommissioning asset as paid in cash
B) CU 1,630,000, being additions of CU 1,850,000 less the non-cash decommissioning asset only, with the change in capital payables ignored
C) CU 1,500,000, being additions of CU 1,850,000 less the CU 220,000 non-cash decommissioning asset and the CU 130,000 rise in capital payables
D) CU 1,760,000, being additions of CU 1,850,000 less the decommissioning asset of CU 220,000 plus the CU 130,000 increase in capital payables recorded

Correct: C difficult IAS 7.43-44, IFRIC 1

Additions are derived as closing 6,100,000 - opening 5,400,000 + depreciation 850,000 + carrying amount of disposals 300,000 = CU 1,850,000. IAS 7 excludes non-cash transactions from the statement of cash flows, and the decommissioning asset is matched by a provision, not by a payment. Purchases still unpaid at the year end also reduce the cash paid: 1,850,000 - 220,000 - 130,000 = CU 1,500,000. Adding back the increase in payables would treat unpaid purchases as cash outflows.

188. An entity claimed a deduction that saves CU 500,000 of tax. It concludes that the authority would probably reject it if examined with full knowledge, with 70% likelihood, and that the outcome is binary so the most likely amount predicts resolution best. The entity thinks there is only a 25% chance that the return will be examined at all. What additional tax liability is recognised?

A) CU 500,000, because the position is assumed to be examined with full knowledge and the most likely outcome is that it is not accepted
B) CU 350,000, being CU 500,000 multiplied by the 70% chance of rejection, because the expected value method is always the better predictor
C) Nil, because the return is unlikely to be examined and a liability is recognised only once the authority has actually raised a query
D) CU 125,000, being CU 500,000 multiplied by the 25% chance that the return is examined, because detection risk reduces the liability

Correct: A complex IFRIC 23.8-11

IFRIC 23 requires the entity to assume that the tax authority will examine the position and have full knowledge of all relevant information, so detection risk is not considered. Because acceptance is not probable and the outcome is binary, the most likely amount, a rejected deduction, is used: CU 500,000. Weighting by the 25% chance of examination or by the 70% rejection probability uses a method that does not better predict resolution of a two-outcome uncertainty, and waiting for a query would ignore the assumed examination.

189. An entity holds 30% of an associate accounted for by the equity method. The investment is carried at CU 240,000 and has no related long-term loans. The entity's share of the associate's loss for the year is CU 410,000. The entity has publicly committed to fund the associate's deficits up to CU 100,000 and has no other obligation. What does it recognise for the year?

A) A share of loss of CU 340,000: the investment is reduced to nil and a CU 100,000 liability is recognised, leaving CU 70,000 unrecognised
B) A share of loss of CU 410,000: the investment is reduced to nil and a liability of CU 170,000 is recognised for the excess of the loss
C) A share of loss of CU 240,000: the investment is reduced to nil and no liability is recognised because the commitment is only a disclosure
D) A share of loss of CU 410,000: the investment is shown at a negative balance of CU 170,000 within non-current assets until profits return

Correct: A complex IAS 28.38-39, IAS 37

IAS 28 reduces the investment to zero and then stops recognising further losses, except that an additional loss is provided for and a liability recognised only to the extent that the investor has legal or constructive obligations or has made payments on behalf of the associate. Here 240,000 reduces the investment to nil and the public commitment adds 100,000, so the recognised loss is CU 340,000 and CU 70,000 is left unrecognised. A negative investment or a liability for the whole excess goes beyond the obligation, and a recognised constructive obligation cannot be treated as a note only.

190. At the year end the board has announced that the Packaging division will be sold, and redundancy of its staff will cost CU 600,000 if no buyer takes them over. No binding sale agreement exists. Separately, a detailed plan to close the head office archive department was announced to its staff in December, with redundancy costs of CU 250,000, relocation of continuing staff of CU 30,000 and legal fees for the divisional sale of CU 80,000. What restructuring provision is recognised?

A) CU 850,000, being the CU 600,000 divisional redundancy and the CU 250,000 archive closure, because the sale has been announced publicly
B) CU 330,000, being the CU 250,000 redundancy plus the CU 80,000 legal fees, because the fees are direct costs of the restructuring and sale
C) CU 280,000, being the CU 250,000 redundancy plus the CU 30,000 relocation of continuing staff, because relocation results from the closure
D) CU 250,000, being the redundancy cost of the announced closure only, as the division sale has no binding agreement and relocation is excluded

Correct: D difficult IAS 37.70-83

No obligation arises from the sale of an operation until the entity is committed by a binding sale agreement, because until then it can change its mind or must find another course of action. The CU 600,000 for the division is therefore not provided, and the legal fees relate to future activity. The archive closure was announced in detail to those affected, so its redundancy cost of CU 250,000 is a constructive obligation. Relocating continuing staff is excluded from a restructuring provision, so the provision is CU 250,000.

191. At the year end an entity has signed a CU 3,000,000 machine purchase contract, with a CU 300,000 deposit paid and no delivery yet, and a CU 5,000,000 building contract with CU 1,800,000 of work certified and invoiced. The board has also authorised CU 2,000,000 of further capital spending with no contract signed. What contractual capital commitment is disclosed, assuming no provision is needed?

A) CU 7,900,000, being CU 2,700,000 for the machine and CU 3,200,000 for the building plus the CU 2,000,000 that the board has authorised
B) CU 7,700,000, being CU 2,700,000 for the machine and the full CU 5,000,000 building contract, because the contract is unperformed in total
C) CU 6,200,000, being the full CU 3,000,000 machine price plus CU 3,200,000 for the building, because the deposit is a separate asset
D) CU 5,900,000, being CU 2,700,000 for the machine and CU 3,200,000 for the building, excluding CU 2,000,000 authorised but not contracted

Correct: D difficult IAS 37.1, IAS 16.74

A contract that is wholly unperformed, such as a purchase order for an asset not yet delivered, is an executory contract and is outside IAS 37 unless it is onerous, so no liability or provision is recognised. The deposit paid is already accounted for as an advance, and work certified is already in the asset, so the commitment is the unperformed balance: (3,000,000 - 300,000) + (5,000,000 - 1,800,000) = CU 5,900,000. Authorised spending without a contract is not a contractual commitment, and IAS 16 asks for contractual commitments to be disclosed.

192. A foreign subsidiary with local currency FC as its functional currency has a decommissioning provision of FC 1,000,000, unwound at 6% a year during the year, with no other movement. Rates in CU per FC are 1.50 at the start, 1.60 average and 1.80 at the end. How does the group record the movement in its consolidated statements?

A) Finance cost of CU 96,000 in profit or loss and an exchange loss of CU 312,000 in other comprehensive income, closing provision CU 1,908,000
B) Finance cost of CU 96,000 in profit or loss and an exchange loss of CU 312,000 also in profit or loss, as the provision is monetary
C) Finance cost of CU 108,000 in profit or loss and an exchange loss of CU 300,000 in other comprehensive income, at the closing rate
D) Finance cost of CU 96,000 in profit or loss and a closing provision of CU 1,596,000, with no exchange difference as it is non-monetary

Correct: A complex IAS 21.39

The subsidiary's local-currency provision is part of a foreign operation, so on consolidation it is translated at the closing rate and its income statement items at the average rate, with all resulting differences in other comprehensive income. Unwinding is FC 60,000 x 1.60 = CU 96,000, the closing provision is 1,060,000 x 1.80 = CU 1,908,000, and the difference is 1,908,000 - 1,500,000 - 96,000 = CU 312,000. Taking the exchange loss to profit or loss applies the single-entity foreign currency rule to a translation difference.

193. A contractor has a fixed price of CU 12,000,000. Costs incurred to date are CU 7,000,000 and the estimated costs to complete are CU 6,500,000. Progress is measured by costs incurred as a proportion of total expected costs. Ignoring discounting, what onerous contract provision is recognised at the reporting date?

A) Nil, because the loss is recognised only through revenue and costs as work proceeds and no provision is made for a contract in progress
B) CU 722,222, because the total expected loss of CU 1,500,000 less the CU 777,778 already shown through revenue and costs on the work done
C) CU 1,500,000, because the whole expected loss is provided in addition to the loss on the work done that is shown through revenue and costs
D) CU 777,778, because the loss on the work done to date is the amount provided and the remaining work is expected to break even exactly

Correct: B complex IAS 37.66-69, IFRS 15

The expected total loss is 12,000,000 - (7,000,000 + 6,500,000) = CU 1,500,000, which IAS 37 requires to be recognised in full once the contract is onerous. Progress is 7,000,000 / 13,500,000 = 51.85%, so revenue is CU 6,222,222 and the loss on work done is 7,000,000 - 6,222,222 = CU 777,778. The provision covers only the loss on the remaining work, 1,500,000 - 777,778 = CU 722,222, so the full loss is recognised once. Providing the whole loss again double counts the part already in profit.

194. An entity has a CU 2,400,000 decommissioning provision for a facility due to close in 2040. The estimate assumes 3% annual cost inflation and a 5% discount rate, and the entity expects a CU 500,000 reimbursement from a government scheme, recognised as a separate asset. Besides the movement reconciliation, which disclosure does IAS 37 require for this class of provision?

A) A description, timing and the CU 500,000 reimbursement, but not the assumptions, because assumptions about future events are exempt as sensitive
B) A description, timing and assumptions, with the reimbursement netted against the CU 2,400,000 in the note so that only the net liability is disclosed
C) A description and expected timing, the uncertainties with major assumptions such as 3% inflation, and the CU 500,000 expected reimbursement
D) The closing carrying amount only, because the assumptions and the reimbursement are accounting policy choices left to management

Correct: C difficult IAS 37.84-85

IAS 37 requires, for each class of provision, a brief description of the nature of the obligation and the expected timing of outflows, an indication of the uncertainties about amount or timing together with the major assumptions made about future events where needed for adequate information, and the amount of any expected reimbursement stating the amount of any asset recognised for it. Here that means the 2040 timing, the 3% inflation and 5% rate assumptions, and the CU 500,000 reimbursement asset. The only exemption is the seriously prejudicial case, not assumptions in general, and reimbursements are shown gross rather than netted.

195. An entity sold 10,000 units of a new product at CU 400 each with a two-year warranty and has no claims history. Industry data for comparable products show 6% of units claim at an average repair cost of CU 150. Independent engineers judge that the new design will reduce the failure rate by one third. What warranty provision is recognised?

A) Nil, because without own claims history no reliable estimate exists and only a contingent liability is disclosed for the warranty
B) CU 60,000, being 10,000 units x 4% (industry 6% less a third) x CU 150, because comparable evidence supports a reliable estimate
C) CU 90,000, being 10,000 units x 6% x CU 150, because the industry rate is applied without the engineers' adjustment to the new design
D) CU 160,000, being 10,000 units x 4% x CU 400, because every failure is settled by replacing the unit at its full selling price

Correct: B difficult IAS 37.25, IAS 37.38

A provision is measured at the best estimate, which IAS 37 says is judged by management supplemented by experience of similar transactions and sometimes by independent expert reports. Except in extremely rare cases a reliable estimate can be made, so the absence of own history is not a reason to recognise nothing. The failure rate is 6% x 2/3 = 4%, giving 10,000 x 4% x 150 = CU 60,000. The unadjusted industry rate ignores evidence, and using the selling price overstates the cost of repair.

196. At the year end an entity has: an allowance for expected credit losses on receivables of CU 46,000, an inventory write-down to net realisable value of CU 28,000, accumulated depreciation of CU 310,000, a warranty liability of CU 35,000, an onerous contract liability of CU 22,000 and a decommissioning liability of CU 150,000. What total is presented as provisions under IAS 37?

A) CU 591,000, being all six items including the CU 310,000 accumulated depreciation, because each is commonly called a provision
B) CU 207,000, being the warranty, onerous contract and decommissioning liabilities, each a liability of uncertain timing or amount
C) CU 281,000, being the three IAS 37 liabilities plus the CU 46,000 credit loss allowance and the CU 28,000 inventory write-down
D) CU 253,000, being the three IAS 37 liabilities plus the CU 46,000 allowance for expected credit losses on the trade receivables

Correct: B difficult IAS 37.10-11, IFRS 9, IAS 2, IAS 16

IAS 37 defines a provision as a liability of uncertain timing or amount. A credit loss allowance is a deduction from receivables measured under IFRS 9, an inventory write-down reduces inventory under IAS 2, and accumulated depreciation reduces the asset under IAS 16, so all are adjustments to assets and not liabilities. Only the warranty, onerous contract and decommissioning liabilities qualify: 35,000 + 22,000 + 150,000 = CU 207,000. Including the allowances confuses a provision for a loss in value of an asset with a provision for a liability.

197. At the year end an entity has sold and delivered 8,000 units, all within their warranty period. A further 1,500 units are in finished goods inventory and 2,000 are under firm orders for delivery in January, with title passing on delivery. Past experience shows 5% of units are repaired at an average cost of CU 120. What warranty provision is recognised?

A) CU 48,000, being 8,000 units sold x 5% x CU 120, because the sale is the obligating event and the other units have not yet been sold
B) CU 60,000, being 10,000 units x 5% x CU 120, because units sold and units under firm orders have both created a commitment to customers
C) CU 69,000, being 11,500 units x 5% x CU 120, because all units held, ordered or sold are covered by the same warranty policy offered
D) CU 57,000, being 9,500 units x 5% x CU 120, because units held in finished goods inventory will carry a warranty once they are sold

Correct: A difficult IAS 37.14, IAS 37.17-19

A provision requires a present obligation arising from a past event, and for a product warranty the obligating event is the sale of the product with the warranty. The units in inventory and those under orders not yet delivered have not been sold at the reporting date, so no obligation exists for them yet and their future warranty cost is not provided. The provision is 8,000 x 5% x 120 = CU 48,000. Including unsold or undelivered units recognises costs of future activity before the event that creates the obligation.

198. Under national labour legislation a company must pay into a workers' participation fund 5% of its profit before tax, measured before deducting the contribution itself. Profit before tax and before this contribution for the year is CU 4,200,000. The amount is payable nine months after the year end. What is recognised at the year end?

A) Nothing at the year end, because the amount is payable nine months later and is recognised in the period in which the cash is paid
B) An expense and a liability of CU 210,000 (5% x CU 4,200,000), because the profit already earned creates a present legal obligation
C) A CU 210,000 appropriation of retained earnings in equity, because a share of profit paid to workers is a distribution and not a cost of employment
D) An expense and a liability of CU 200,000 (CU 4,200,000 x 5/105), because the percentage is applied to profit after the contribution itself

Correct: B difficult IAS 19.19, IAS 37.14

IAS 19 requires the expected cost of profit-sharing payments to be recognised when the entity has a present legal or constructive obligation as a result of past service and can make a reliable estimate. The statute fixes the obligation as a percentage of profit already earned, so the liability exists at the year end even though cash moves later: 5% x 4,200,000 = CU 210,000, charged to profit or loss as an employee cost. The 5/105 method applies when the base is profit after the charge, which the law here does not say, and a payment required by law to workers is a cost of their service, not a distribution to owners.

199. An entity has 60 employees, each entitled to 10 paid days of leave a year, with unused days carried forward for one year. At the year end the average unused entitlement is 3 days per employee. The entity expects 54 employees to take no more than 10 days next year and 6 employees to take 12 days each. The cost of a day is CU 4,000. What liability is recognised for accumulated leave?

A) CU 720,000, being all 180 unused days (60 employees x 3 days) at CU 4,000, because every unused day is a liability at the year end
B) CU 48,000, being the 12 extra days (6 employees x 2 days) that the entity expects to pay for beyond next year's own entitlement
C) Nil, because paid leave is recognised as a cost only when it is actually taken and no cash leaves the entity at the year end
D) CU 72,000, being the 18 unused days of the 6 employees who are expected to exceed their entitlement, at CU 4,000 a day

Correct: B difficult IAS 19

For accumulating paid absences IAS 19 requires a liability at the year end for the additional amount the entity expects to pay as a result of the unused entitlement that has accumulated. Current-year entitlement is assumed to be used first, so only the 6 employees who take 12 days draw on carried-forward days, and they draw on 2 each: 6 x 2 = 12 days x CU 4,000 = CU 48,000. Providing for all unused days ignores that most of them will lapse unused or be absorbed within next year's entitlement, and waiting until leave is taken ignores the obligation that has accrued with service.

200. An entity's warranty provision rises from CU 280,000 to CU 360,000 during the year. Warranty costs are deductible for tax only when paid. The tax rate is 25% and the entity expects sufficient taxable profit in future to use any deduction. What deferred tax is recognised for the year in respect of the provision?

A) No deferred tax, because the provision is a future cost that is not an allowable deduction yet and the difference is therefore permanent
B) A deferred tax asset of CU 90,000 at the year end, with the whole CU 90,000 credited to profit or loss, ignoring the opening balance
C) A deferred tax liability of CU 90,000 at the year end, with CU 20,000 charged to profit or loss, because the deduction is available only later
D) A deferred tax asset of CU 90,000 at the year end, with CU 20,000 credited to profit or loss, being 25% of the CU 80,000 rise in the provision

Correct: D difficult IAS 12.24, IAS 37

The provision has a carrying amount of CU 360,000 and a tax base of nil, because the cost is deductible only when paid, so there is a deductible temporary difference of CU 360,000 and a deferred tax asset of CU 90,000 at 25%. The opening asset was 280,000 x 25% = CU 70,000, so the deferred tax credit for the year is CU 20,000. Crediting the whole closing balance double counts the opening asset, a liability reverses the direction of the difference, and the difference is temporary, not permanent, because the deduction will be obtained when the claims are paid.