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Hi Mike,
My question relates to IAS 37 – Provision for Onerous Contracts and specifically on low value leases.
If a client has a year end of say 31 December 2018, and on 1 January 2018, they closed a retail outlet but had two years remaining on their lease agreement. The terms of the lease agreement do not allow them to sublet the premises. The annual cost of the lease was €/£150,000
So, per IAS 37 a provision of €300,000 (€150k * 2 Years) is accounted for at 1.1.18, by Crediting Provisions for €300k and Debiting Lease Expense €300k.
My question is , by debiting lease expense in the 2018 accounts with the full €300k, is this not going against the accruals concepts, where expenses are recognised as they are incurred?? Why are we recognizing the 2019 lease expense in the 2018 Income Statement?
Thanks
LiamYou may be getting a little confused with your dates but I shall work with the dates that you have given me
Point 1 is that, by the end of the financial year 31 December, 2018, one of those two onerous years has now gone by so we would simply debit lease expense and credit cash with the $150,000 relating to 2018
That leaves us with the onerous contract from which there is no escape so a debit to the statement of profit or loss and a credit in the statement of financial position to the tune of $150,000
The difference between this onerous liability and other accruals is that we are able to quantify precisely the extent of the obligation whereas with ‘ordinary’ accruals we are not normally able to quantify with any real degree of accuracy / measurement
If you consider the rules of contingencies and provisions, we need to go through the list of pre-requisites:
is there a current obligation
arising from some past event
the settlement of which obligation will result in the outflow of economic resource
capable of reliable measurementThe scenario that you have set up ticks all those boxes so we should recognise that obligation
OK?
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