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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

On 15 December, the board of Rilo Co decided to close a factory and approved a detailed formal plan. Employees and customers were told on 20 January, after the reporting date of 31 December but before the financial statements were authorised. How should the closure be treated in the year ended 31 December?

No provision is made at 31 December. A restructuring obligation arises only when there is a detailed formal plan and those affected have a valid expectation, through announcement or implementation, by the reporting date. The announcement came afterwards, so it is disclosed as a non-adjusting event.

  1. ANo restructuring provision, because no valid expectation was raised in those affected by the reporting date; disclose as a non-adjusting eventCorrect
  2. BProvide in full, because the board decision is a constructive obligation
  3. CProvide only for redundancy costs, not other closure costs
  4. DRecognise a contingent asset for expected savings

Explanation

A restructuring provision needs a detailed formal plan and a valid expectation in those affected, by starting implementation or announcing the main features, before the reporting date. A board decision alone is not enough. The announcement came after the year end, so it is a non-adjusting event.

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