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141 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.
Which of the conditions for a provision will be met at 31 December 20X4?
Yes/No
There is a present obligation from a past event
A reliable estimate can be made
There is a probable outflow of economic benefits
ANS
There is a present obligation from a past event No
A reliable estimate can be made Yes
There is a probable outflow of economic benefits Yes
Whilst there is an estimate of $500,000 and it is probable that Faubourg will make the
changes, there is no present obligation at 31 December 20X4.Good day,Pls i don’t understand why there is no present obligation since it was said in the question that Fauberg has a history of compliance with regulations which is a constructive obligation.I’ll appreciate if you can explain better.
Hi,
Although there is a new legal requirement the company can still decide to break the law and hence therefore there is no obligation to pay the $500,000. They may have to provide for the fines in this instance.
Keep an eye out for this one as it is the one that catches a lot of people out as they automatically see legal obligation and provide.
Thanks
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