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A factory worker of ICL Co was seriously injured on 10 June 2015 during a production process.Subsequent developments in this matter are as follows:
(i) On 26 July 2015 the worker filed a claim for 25 million and alleged violation of safety measures on part of ICL. The lawyers of ICL anticipate that there is 60% probability that court would award 12 million and 40% likelihood that the amount would be 8 million.
Required: Whether a provision is required to be incorporated for the year ended 30 June 2015.
Colleagues;
Provision should only be recognized when:
there is a present obligation; transfer of the company’s economic benefits to settle claim and there is a reliable estimate.The situation in the case:
At the company’s financial reporting date – it’s probability that it will have to pay 12 million; therefore, information from the legal team should be use to satisfy the criteria of the standards. There are valid ground – seriously injured on the job and bring the obligation to pay for damages – estimated at 12 millions. This will result in an outflow of the company’s resources – economic value – deteriorating finance as an expense which was never budgeted.Liability increase – Cr Provisions with the amount and Dr the corresponding expense. Note that it must relate to the corresponding financial year only – April to March 2015 for example; it must be accounted in the SoFP. Providing that the company has received the claim – Lawyers advice; it MUST on June 30, 2015 show the entries in the SoFP.
It is obvious that this claim will be settled in another financial year – Crediting method of payment – bank using a cheque as evidence (receipt) and clear the provision with a debiting entry of the amount.
Just reading through this and I was wondering if there is an obligation at the year end of 30th June?
The employee did not file a claim until end July. So in June there was no legal requirement (although ethically you could argue a point) and no figure provided by the lawyers. But as it was a serious accident, it would be prudent to presume some compensation would be required.Maybe I am just over thinking this?
But I can be forgiven for that as it draws closer to the exams…..🙂
The financial statements for 2015 – 30 June should show the actions of the company during its reporting year – ALL. The event took place before the financial year and the claim was filed July 2015.
There is an obligation at year end – it is probable for success, measurable with an outflow of resources.
This is testing for IAS 37 and IAS 10; it is an adjusting event.
so it’s not 60%x12 + 40%x8=10.4, Dr P or L Cr provision? Instead we only take 12 into account as the amount with highest probability? what about 50% 50%?
Disclose by – notes to the financial statements; remember, the steps for creating a provision – probable which is more than the 50%; say 51. Anything else we must disclose by note or ignore. I have learn in the early stage of accounting – provision are probable greater than fifty percent.
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