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Hi tutor I have a confusion regarding the following question
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 (as a credit to the statement of profit or loss) 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 futureWhich of the above suggested treatments of provisions is/are permitted by IFRS?
The correct answer seems to be (iv). Does that mean the rest of them are not permitted by IFRS? Because according to my understanding of provisions, (i) and (ii) seem correct as well.
That was a bit naughty of you – you didn’t give e the possible solutions
Anyway, here’s why the answer is (iv)
(i) it is possible to make provision based on the estimate of goods likely to be returned but the provision should be restricted to the economic outflow that is occasioned by those returns. The goods will likely go back into inventory so the provision should be for the loss of profit and not for the sales value
(ii) it is not allowable to make provision for ‘unforeseen liabilities’, particularly those that arise after the year end
(iii) where there is a change in the estimated remaining useful life of an asset, the depreciation is adjusted to write off the asset over that revised estimated useful life
(iv) deferred tax should b calculated and provided whenever an asset is revalued no matter what the intentions of the entity concerning the retention or otherwise of the asset
OK?
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