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

Zenith plc decides on 15 December 20X5 to close a factory. Detailed formal plans were approved by the board on that date, but the plan was not announced to employees, customers or suppliers until 20 January 20X6. The reporting date is 31 December 20X5 and the financial statements are authorised on 25 February 20X6. How should the closure costs be treated in the year ended 31 December 20X5 under IAS 37?

No provision is recognised at 31 December 20X5. A restructuring obligation needs a detailed formal plan plus a valid expectation raised in those affected, by starting implementation or announcing it. The announcement came after the reporting date, so it is a non-adjusting event and is disclosed if material.

  1. ARecognise a restructuring provision at 31 December 20X5 because the board approved a detailed formal plan
  2. BDo not recognise a provision at 31 December 20X5 because no valid expectation had been raised in those affected by the reporting date; consider disclosure of the announcement as a non-adjusting eventCorrect
  3. CRecognise a provision at 31 December 20X5 because the announcement occurred before the financial statements were authorised, treating it as an adjusting event
  4. DRecognise a provision only for the redundancy costs, but not for the costs of closing the site

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 to implement the plan or announcing its main features. This had not happened by 31 December 20X5. The announcement in January 20X6 is a non-adjusting event, so the board decision alone (option A) is insufficient.

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