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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Harbour Ltd has a year end of 31 December. In December it decided to close a division and drew up a detailed formal plan, but it had not started implementing the plan or told anyone affected by the end of the year. Under IAS 37, how should the closure costs be treated in the year-end financial statements?

No provision should be recognised. A restructuring creates a constructive obligation only when there is a detailed formal plan and affected parties have a valid expectation, through implementation or announcement. Board approval alone at the year end does not create a present obligation.

  1. ARecognise a provision because the board has approved a detailed plan
  2. BRecognise a provision for half the estimated cost
  3. CDo not recognise a provision, as no constructive obligation existsCorrect
  4. DDisclose a contingent asset

Explanation

A restructuring provision requires a detailed formal plan and a valid expectation in those affected, created by starting implementation or announcing the main features. Neither happened by the year end, so there is no constructive obligation and no provision. Board approval alone is not sufficient.

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