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Fauberg owns a number of offices in country Y and is in the process of finishing its financial
statements for the year ended 31 December 20X4 In December 20X4, country Y announced
changes to health and safety regulations, meaning that Fauberg’s air conditioning units will
have to be replaced by 30 June 20X5.
This is estimated to cost Fauberg $500,000. Fauberg has a history of compliance with
regulations and intends to do the work by June 20X5.Should a provision be recognized for the year ended 31st december 20X4?
IN THE ANSWER THEY HAVE EXPLAINED THAT NO PROVSION SHOULD BE RCOGNIZED SINCE AT 31ST DECEMBER 20X4 THERE IS NO PRESENT OBLIGATION THERE IS FUTURE OBLIGATION
DOUBTS – Isn’t the answer wrong since they have announced their plans threre is a contructive obligation and hence provision should be recognized
Hi,
This is a funny one to keep an eye on whereby we are obliged to do something in the future, we do not have to do it now and can quite simply break the law and so not provide for the cost to replace. We would have to provide for any fines from breaking the law through not replacing the units.
Thanks
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