- This topic has 5 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Hi Mike,
“Making a provision for a constructive obligation of $400,000; this being the sales value of goods expected to be returned by retail customers after the year end under the company’s advertised 30 day returns policy”
Why should the above not be treated as a provision?
This is taken from June 2015 paper (MCQ: question 16)
In a review of its provisions for the year ended 31 March 2015, Cumla’s assistant accountant has suggested the following accounting treatments:
I. Making a provision for a constructive obligation of $400,000; this being the sales value of goods expected to be returned by retail customers after the year end under the company’s advertised 30 day returns policy
ii. Based on past experience, a $200,000 provision for unforeseen liabilities arising after the year end
iii. The partial reversal of the accumulated depreciation provision on an item of plant because the estimate of its remaining useful life has been increased by three years
iv. Providing $1 million for deferred tax at 25% relating to a $4 million revaluation of property during March 2015 even though Cumla has no intention of selling the property in the near future
Which of the above suggested treatments of provisions are permitted by IFRS?
Answer: IV only
I was torn between choosing option (i) and option (iv) as the answer. Turned out the answer to be option IV. Why is option (i) wrong?
Just want to check on option (ii) also, this option is wrong mainly because of the phrase “unforeseen liabilities”, right? A provision should be made for specific items (matching concept), is that correct?
Hoping to hear from you, thank you 🙂
The first possibility includes this statement “this being the sales value of goods expected to be returned by retail customers after the year end”
But it won’t be the entire sales value that is lost – some of those goods could be put back into stock and sold again
The provision should only be for the profit element
We are no longer allowed to make provision for unforeseen liabilities. We used to be able to but times have changed
OK now?
OK, wow this question is tricky. Unforeseen liabilities were never mentioned in the BPP study text, and I’m getting worried now..
Thanks for the help!
- You must be logged in to reply to this topic.