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Im really confused regarding provisions concept specially with IAS 37, in my view and what seems logical is that provisions are created before the event occurs , that’s why its called a provision! But according to what my tutor told me its created when event occurs and becomes a past event, and secondly are provisions for depreciation and bad debts or even discontinued operations any different from provisions discussed in IAS 37? Please explain In detail.
The sale has been made …. the amount is included in receivables …. but now you’re doubtful that the receivable will pay.
The sale that has given rise to the doubtful receivable is a past event.
Your concerns about non-receivability is a current event
The non-receipt is a future (non-) event
You don’t make the provision (except EXCEEDINGLY RARELY) as you make the sale
So your tutor is correct – the provision becomes applicable as a result of the later event of realising that your receivable is in financial difficulty
Are they different? No, not really. They are a way of recognising that an asset is not as valuable to the owner whether as a result of non-recoverability or simply (depreciation) through the act of spreading the cost of that asset over those years that are expected to benefit from the use of that asset
OK?
So Sir, u are saying that all provisions can be linked to Past events and provisions are only created when event occurs? Meaning to say in provision for bad debt and asset the acquisition of the asset is the event? Not the doubt that that will not play , and what about discontinued operations?
Sir provision for discontinued operations if company has a coordinated plan that it will close down an area of operations then it could make a provision
So what’s your question? Are you making provision for future losses? Or for costs that are already committed?
So what is the ‘The Past Event’ when creating provision for discontinued operations and provision for depreciation or provision for dismantling costs in IAS 16
I do wish that you would stop talking about a provision for discontinued operations – I asked you for the situation that you had in mind and the example you gave I dismissed
Provision for dismantling is establishing / recognising the today value of an obligation that will need to be settled xxx years in the future
A provision for depreciation is merely a neat way of accumulating the amounts by which an asset has been written off against profits. It has the effect (but not an acceptable accounting treatment) of crediting the book value of the affected asset account
Now, answer me this, please. Why the deep fascination about provisioning? It isn’t so deep a topic and, with rare exceptions like provisions for dismantling, it should be straight forward
Because sir, I don’t get this past event theory , now u said provision for dismantling is today value of future expected losses , how can we make provision until or unless we perform the act of dismantling according to what u said earlier,
The past event in that situation is the event that has given rise to the obligation to dismantle. That event was the signing of the commitment to dismantle. So, today, we make an estimate of how much it would cost us TODAY to dismantle. Then we put that figure into the future (say 20 years) and discount it to arrive at the present value of dismantling twenty years into the future.
But of course prices rise, cost of capital changes, circumstances alter so, next year, we re-assess how much this obligation would cost us TODAY next year, put that figure 19 years into the future and discount it
Then the year after we estimate how much it would cost TODAY, put that figure 18 years into the future, discount it
Then the year after we estimate ho……………………..
OK now?
Thanks sir for bearing with me, it takes a while for me to understand things , thanks a million
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