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Hi Sir, the question is shown as following:
“A new accountant has recently started work at Gustoso. She noticed that the provisions balance as at 31 December 20X7 is significantly higher than in the prior year. She made enquiries of the finance director, who explained that the
increase was due to substantial changes in food safety and hygiene laws which become effective during 20X8. As a result, Gustoso must retrain a large proportion of its workforce. This retraining has yet to occur, so a provision has been
recognised for the estimated cost of $2 million. ”
And the answer explains that:
“No provision should be recognised because Gustoso does not have an obligation to incur the training costs. The expenditure could be avoided by changing the nature of Gustoso’s operations and so it has no present obligation for the future expenditure.”
I do not understand why the changes in laws does not form a legal obligation, as the question states that as a result of changes in laws the retaining happens. I also do not understand why the expenditure can be avoided by changing the nature of the company, in that case, the company should not produce food products in the future?
If the law is changed saying that I must wear a crash helmet on my bike, I can make the decision to walk to work in future or even to never leave the house.
100% agree with the answer – no legal obligation. The company is free to cease trading and then it will not be breaking the law.