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June 9, 2012 at 11:22 am #53260Anonymous
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This question asks you about provisions and asks you how they relate to a mining company. It take issue with part b).
The question states that just before the 31/12/X0 the government of the country in which there is a mine is virtually certain to pass legislation requiring mining companies to clear up site contamination when they are done extracting. Not certain. Virtually certain. To me, this means that there is not yet a legal obligation to do so and thus a provision should not be created.
However, the answer says that as it is virtually certain a legal obligation has been created. It is virtually certain that I am going to drive to the supermarket today (as I have no food in the house). But I may get out to my car and find a flat battery and it won’t start. Then I will be certain NOT to drive to the supermarket. In relation to this question, just because a government is virtually certain to pass legislation does not mean it will. Until it has been written into law, it is just a proposal. Look at the UK government in the past few weeks U turning on most budget proposals!
My answer to the question was that there was a possible obligation and therefore a contingent liability should be disclosed for the accounts up to 31/12/X0. For the accounts to 31/12/X1 a provision should be created as the legislation was passed.
However, because my answer to the year end 31/12/X0 was incorrect I ended up losing marks for the year end 31/12/X0 as I wasn’t unwinding the discount of 1 year and charging it to finance costs. Basically in the exam I wouldn’t have been able to get any error carried forward marks. This is worrying.
I know I am wrong, but to me something isn’t certain until it is certain. This is going to confuse me in the exam as I’m going to think one thing, then will have to remember that I am wrong in these situations and instead put an answer that I think is wrong but will probably be right.June 9, 2012 at 1:11 pm #99824Najiya
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According to IAS 37, If a liability is probable or virtually certain, it should be provided for in the financial statementsJune 9, 2012 at 1:49 pm #99825Anonymous
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I don’t see where it says that in your link.
It says if there is a probable outflow of economic benefit to settle a present obligation. It doesn’t mention the probability of the obligation. You either have an obligation or you don’t, and there is no present obligation until it is legislation.
The entity in the example could stop mining the site at 31/12/X0 and they would have not have to clear it up as the legislation didn’t get signed off until the March of the following year.
Do you see where I am coming from? I think this is a poorly posed question.
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