Week 1 HKAS 37 assignments and PDF

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Chapter 1 Provision assignment Ans
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AC4301 Corporate Accounting II, 2020-21 Semester B HKAS 37 Provisions, Contingent Liabilities and Contingent Assets Week 1 Assignments – Suggested Answers Question 1

Present obligation Probability Amount Classification

Case 1 Yes Certain Certain Liabilities

Case 2 Yes Probable Estimate Provision

Accounting treatment

Recognized

Recognized

Case 3 Yes Probable Unknown Contingent liabilities Disclosed

Case 4 Yes Possible Estimate Contingent liabilities Disclosed

Case 5 Possible Possible Estimate Contingent liabilities Disclosed

Question 2 (c) is the most appropriate treatment. A constructive obligation exists when the detailed plan was announced publicly. No obligation exists under (a) because the firm can change its plan subsequently. Option (b) is too conservative and will result in a liability off balance sheet. Question 3 Present obligation as a result of a past obligating event - The making of the alterations creates a legal obligation under the terms of the lease to restore the alterations made to the premises and is thus an obligating event. At the end of the reporting period, however, there is no obligation to rectify the wear and tear that will be caused by the use of the premises. An outflow of resources embodying economic benefits in settlement - Probable. Reliable estimate - assumed Conclusion - A provision is recognised for the best estimate of the eventual costs that relate to the restoration of the alterations made to the premises. These costs are included as part of the cost of the alterations. Journal: Dr Removal cost Cr Provision for removal cost

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Question 4 a. At 31 December 2017 Present obligation as a result of a past obligating event - There is no obligation because there is no obligating event either for the costs of fitting smoke filters or for fines under the legislation. Conclusion - No provision is recognized for the cost of fitting the smoke filters. b. At 31 December 2018 Present obligation as a result of a past obligating event - There is still no obligation for the costs of fitting smoke filters because no obligating event has occurred (the fitting of the filters). Since the entity can avoid the future expenditure by its future actions, for example, by changing its method of operation, it has no obligation for that future expenditure in fitting the filters. However, an obligation might arise to pay fines or penalties under the legislation because the obligating event has occurred (the non-compliant operation of the factory). An outflow of resources embodying economic benefits in settlement - Assessment of probability of incurring fines and penalties by non-compliant operation depends on the details of the legislation and the stringency of the enforcement regime. Conclusion - No provision is recognized for the costs of fitting smoke filters. However, a provision is recognized for the best estimate of any fines and penalties that are more likely than not to be imposed.

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