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Hi Mike sir, For this question, Part d) the warehouse inspection every 3 years, I have written that there is a risk that the inspection cost may not be recognized as a provision under IAS 37 since there is a i) present obligation (legal which is the regulation relating to the health and safety inspection every three years), ii) A probable outflow of benefits (obviously) and iii) A reliable estimate can be made of the amount ($25,000). So this is what I wrote. HOWEVER, the answer says that this cost should be capitalised as per IAS 16. Can you tell why? Thank you
We are looking, surely, at the $25,000 that has already been paid in January. We’re not looking at the $25,000 that is due in just less than 3 years’ time
The $25,000 that was paid in January for each of the 35 warehouses should be spread over the three years ended 31 December, 2011
It would be incorrect to expense a three year cost in just one year
In fact, it would be wrong to make a provision for the future costs because, in contrast to your comment, there in fact is no present obligation. Papaya could close the warehouses or could even close the entire business and avoid those $25,000 costs for each inspection
OK?
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