ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period
On 15 December 20X5, the board of Marlow Group approved a detailed plan to close a division, but on 31 December 20X5 (year end) it had not told employees or customers, and no actions had begun. The announcement to affected parties was made on 20 January 20X6, before the financial statements were authorised. What is the correct IAS 37 treatment in the 20X5 financial statements?
No provision is recognised at 31 December 20X5, because no valid expectation had been raised in those affected by the year end. The January announcement is a non-adjusting event, disclosed if material, since the constructive obligation arose after the reporting period.
- ARecognise a restructuring provision, because the board approved a detailed plan
- BRecognise a provision for direct expenditure only, excluding retraining costs
- CRecognise no provision, and treat the announcement as a non-adjusting event with disclosure if materialCorrect
- DRecognise no provision, and treat the announcement as an adjusting event
Explanation
A constructive obligation arises only when a detailed formal plan exists and a valid expectation is raised in those affected by starting implementation or announcing the main features. This had not occurred at the year end, so no provision is recognised. The later announcement is a non-adjusting event requiring disclosure if material.
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