ACCA SBR · Guided practice (Show me how)
Chapter 21: Provisions, contingent assets and liabilities (IAS 37)
Provisions and an adjusting event
Example 1 - Provisions and contingent liabilities (chapter 21). York operates in the oil industry and is regularly involved in the contamination of land, seas and rivers given the nature of the business. It does however have a {{policy|publicised environmental policy on its website and in its annual report|entity}} that states that it will clean up any environmental damage incurred. It is currently involved in three major projects where the costs of cleaning up the contamination and the local laws are as follows:
| Environmental clean-up costs | Local laws |
|---|---|
| $4 million | {{law1|Law enforces the clean-up of environmental damage|entity}} |
| $5 million | {{law2|No law exists for the clean-up of environmental damage|entity}} |
| $6 million | {{law3|Law to enforce clean-up of environmental damage will come into force in the next accounting period|entity}} |
Environmental provisions (chapter 21). A company builds a wind farm at a construction cost of $40 million. At the end of the wind farm's life the company is required by law to demolish the wind farm and clean up the site; the present value of that cost is $8 million.
Example 1 - Inventory (chapter 19). Bravo manufactures components for the retail industry; its inventory is valued at cost. The cost per unit is $1,000 for the first stage of production, with conversion costs of $500 in the second stage, giving $1,500 for a finished product. The selling price per unit was $1,050 at the first stage and $1,700 for a finished product. The selling costs are $10 per unit, and Bravo has 100,000 units at the first stage of production and 200,000 units of finished product. Shortly after the year end a competitor released a new model and Bravo had to reduce its selling price to $1,450 for the finished product and $950 for the first stage of production.
York: environmental clean-up
Calculate the provision York should recognise for the environmental clean-up costs and the provision it would recognise without its published policy, and state the basis of the obligation for the $5 million project.
The wind farm
Calculate the amount debited to property, plant and equipment when the wind farm is constructed.
Bravo: a price cut after the year end
Calculate the net realisable value per unit of Bravo's finished products and first-stage units, the total write-down and the closing inventory at the reporting date, and state the type of event the price reduction is.
Opening this exercise…