Skip to content

ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework

Zeta plc has a policy of repainting its leased factory every five years. No legal or constructive obligation to repaint exists, and Zeta could avoid the cost by changing its operations or vacating the premises. Management wants to recognise a provision now, building it up evenly over the five years. Applying the Conceptual Framework liability definition and IFRS Accounting Standards, what is the correct treatment?

No provision should be recognised. A liability needs a present obligation arising from a past event, and Zeta can avoid repainting by its own future actions. Spreading the cost to match benefits does not create an obligation, so the repainting cost is recognised only when incurred.

  1. ARecognise a provision built up evenly, because the expense is matched to the periods benefiting
  2. BRecognise no provision, because there is no present obligation arising from a past eventCorrect
  3. CRecognise a provision only for the portion of the five years already elapsed, discounted to present value
  4. DRecognise a contingent liability on the statement of financial position

Explanation

A liability requires a present obligation to transfer an economic resource arising from a past event. Because Zeta can avoid the expenditure by its future actions, no obligation exists, so no provision is recognised. Option A reflects accruals-based matching, which the framework does not permit to override the liability definition.

Did you get it right without looking?

One question tells you little. A timed set on The applications, strengths and weaknesses of the accounting framework shows your real accuracy, how long you take and where you lose marks.

Practise The applications, strengths and weaknesses of the accounting frameworkFree diagnostic mock

More The applications, strengths and weaknesses of the accounting framework questions