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ACCA Strategic Professional · Strategic Business Reporting (International) · Professional and ethical behaviour in corporate reporting

Vantor Co's directors want to reduce volatility in reported profit. In a profitable year they increase a restructuring provision by $4m even though no detailed formal plan exists and no valid expectation has been created in those affected. They intend to release it in a weaker year. Which statement is correct?

The provision must not be recognised, because IAS 37 requires a present obligation and, for restructuring, a detailed formal plan and valid expectation in those affected. Creating it to release in a weaker year is cookie-jar income smoothing, which is unethical and misleading to users.

  1. AThe provision is acceptable because IAS 37 allows prudent general reserves for future years
  2. BThe provision is acceptable provided it is disclosed as a note to the financial statements
  3. CThe provision must not be recognised because no constructive obligation exists, and creating it to smooth income is a 'cookie jar' manipulationCorrect
  4. DThe provision is acceptable but must be released at the next year end

Explanation

IAS 37 requires a present obligation from a past event; a restructuring needs a detailed formal plan and a valid expectation in those affected. Without them no liability exists. Building a provision to release later is classic income smoothing, which misleads users. Disclosure does not cure recognition of a non-existent liability.

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