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

On 15 December 20X5, the board of Kappa Co decided to close a division and approved a detailed formal plan. Before the reporting date of 31 December 20X5, the plan was not announced and no employees or customers had been told. The closure would cost $4m in redundancy. Under IAS 37, how should Kappa treat the closure at 31 December 20X5?

No provision should be recognised. A restructuring provision requires a detailed formal plan and a valid expectation in those affected, created by starting implementation or announcing its main features. A board decision that has not been communicated creates no constructive obligation at the reporting date.

  1. ARecognise a $4m restructuring provision because the board approved a detailed formal plan
  2. BRecognise no provision because no valid expectation of closure has been raised in those affectedCorrect
  3. CDisclose a contingent liability only, with no provision, because the cost is uncertain
  4. DRecognise a provision for half of the $4m because the plan was approved in the last half of the month

Explanation

A restructuring constructive obligation arises only when there is a detailed formal plan and the entity has raised a valid expectation in those affected by starting implementation or announcing the main features. A private board decision is not enough, so no provision exists at the reporting date. Option 0 ignores the announcement requirement.

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