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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

Kestrel Ltd has a five-year contract to supply components at a fixed price. Because of a rise in material costs, the unavoidable costs of meeting the contract now exceed the economic benefits expected from it. Under IAS 37, how should Kestrel treat this?

Kestrel should recognise a provision for the onerous contract, because the unavoidable costs of fulfilling it exceed the expected benefits. This is a present obligation from a past event, so IAS 37 requires recognition rather than contingent liability disclosure.

  1. ARecognise a provision for the present obligation under the onerous contractCorrect
  2. BDisclose a contingent liability only, as the loss relates to future periods
  3. CRecognise nothing until the contract is cancelled
  4. DRecognise a provision for the full future operating losses of the business

Explanation

IAS 37 requires a present obligation under an onerous contract to be recognised as a provision. Disclosure only is wrong because the obligation is present and probable. Future operating losses outside the contract are not provided for.

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