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Please help…
Which ONE of the following would be valid grounds for a provision?
A- A company has decided to close down a division and has estimated the restructuring cost
B- A law comes into force which means that by the end of the following year a company will have to install safety guards on its machinery and the cost involved has been reliably estimated.
C- A company has moved its offices out of London but is tied into the lease of the London building for another 6 months and is not permitted to sublet it to another tenant.D- An ex-employee is suing the company for wrongful dismissal. It is almost certain that damages will have to be paid but the amount is uncertain.
Point a- Ok yes I understand why.. we can not make provisions for losses/ restructuring costs.
B- why will we not make a provision for this? is it because the effects of the law will affect following years financial statements?
C- answers says this will result in a contingent provision. I do not understand why/
D- ok.. this is clear.. since the amount paid out in uncertain.. there is no probable estimate..
thanks
B – no. It’s because we can simply close down our operations and move to another country
C – The expression ‘contingent provision’ is an interesting one
I would have thought that this was an appropriate case for a provision but I suppose that there is a chance that the landlord may re – let the offices within the 6 months so there is a contingency that we won’t have to pay
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