Chapter 13: Provisions, contingent assets and contingent liabilities (IAS 37)

Three items from the notes (chapter 13, IAS 37).

(a) HR Co has a year end of 31 December 2018. On 1 July 2018 a former employee brought a legal claim for unfair dismissal. HR Co's legal team say it is probable that HR Co will lose the case, resulting in a payment of $495,000 on 30 June 2019. HR Co has a cost of capital of 10% per annum. A one-year discount factor at 10% is 0.9091.

(b) Decommissioning. An item of PPE was acquired for $100 million on 1 January 20X1 with a useful life of ten years. Local legislation requires it to be decommissioned at the end of its useful life; the current estimate of the decommissioning cost in ten years' time is $10 million. A cost of capital of 10% per annum is used; the present value of $1 payable in ten years' time at 10% is $0.386. The year end is 31 December 20X1. Work in $000.

(c) Best estimate. (i) After an oil-rig explosion a company is probably liable for the clean-up. Its lawyers estimate the settlement at $25 million (20% likely), $40 million (45% likely) or $65 million (35% likely). (ii) A second-hand car dealer gives a six-month warranty. It estimates that 80% of the cars sold will need no repairs, 15% minor repairs and 5% major repairs. If every car sold needed minor repairs the cost would be $100,000; if every car needed major repairs the cost would be $500,000.