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Hello prof,
This sub question is about creation of provision.
It says that on a day within the financial year the govt has introduced environmental legislation requiring shawler to fit anti pollution filters anytime within 2 years.
My question is why would you not create a provision for this? the suggested answer says that there is no current obligation. But i feel that there is a current obligation because
1) It says it could fit anytime within 2 years, which means today or tomorrow or maybe next year.
2) filters relate to the main item of their plant. Now assuming that they want to continue their business they ought to fit the filters by my understanding.
So how is there not a present obligation?
this is the suggested answer
“Although the legislation requiring the fitting of the filters has been passed, it does not come into force for two years” where have they mentioned that in the question?Second EVEN IF we pay it after two years, arent there situations where we provide for expenses at their discounted present values?
please help!
“It doesn’t come into force for two years” means that no action can be taken by the government until those two years have elapsed
What IS relevant is that Shawler has no obligation! They have an alternative course of action available to them which will not involve them in fitting any anti-pollution filters!
They could close down their operation! So it isn’t the situation that there is no alternative to fitting filters. Closure is an option
ok so what i understood after second reading is-
asking three questions:
1) am i required to pay the money?
2) do i have an option other than paying the money?
3) is there a reasonable estimate of the cost?if the answers pan out as YES NO YES- create provision
and if YES YES and YES- no provisionand in similar scenario if it is based on fulfillment of certain conditions and the amount is uncertain, then create a contingent liability.
is it ok?
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