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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Marlowe Co has a December year end. In November 20X5 its board decided to close a factory in 20X6, but by 31 December 20X5 it had not started to implement the plan, had not announced it to anyone, and had not told employees. Estimated closure costs are $400,000. What is the correct treatment in the financial statements for the year ended 31 December 20X5?

No provision or disclosure is required. A board decision alone does not create a constructive obligation; the plan must be started or announced to those affected by the year end. Marlowe had done neither, so there is no present obligation at 31 December 20X5.

  1. ARecognise a provision of $400,000
  2. BRecognise a provision of $200,000 as the closure is half likely
  3. CDisclose a contingent liability of $400,000
  4. DMake no provision and no disclosureCorrect

Explanation

A restructuring provision needs a constructive obligation, which arises only when there is a detailed formal plan and the entity has raised a valid expectation in those affected by starting to implement it or announcing it. A board decision alone is not enough, so there is no present obligation at the year end. No provision is made, and since there is no obligation at all (not even a possible one arising from a past event), no contingent liability disclosure is required either.

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