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If a property lease includes requirement that the premises are repainted every five years and the future cost is estimated at $100,000. IAS 37 does not permit to recognise the provision as there is no obligation to incur this cost until the five years have elapsed. Over the first four years this is a future obligation which can be avoided by the simple means of
selling the lease to someone else. Is It right sir.but after 5yr has elapsed and they haven’t repainted the property yet, at that time will we create provision by the estimated amount. Am i right sir.
there is a similar past question Shawler
On 1st april 2012, the govt. introduces a legislation which had the effect of requiring Shawler to fit anti-pollution filter to its furnace in 2 yrs.Whether shawler need to provide provision for cost of the filter on Sep 2012.Now we know it is a future obligation cause the effect is not binding until 2 yrs has elapsed. and also shawler can avoid it by selling of that business. So no need to create the provision.
My question is what after the 2 yr has elapsed and shawler hasnt yet fitted the filter. That time will we create a provision with the cost of filter?
answer says if then also no need of provision why is it so?
@sguha said:
If a property lease includes requirement that the premises are repainted every five years and the future cost is estimated at $100,000. IAS 37 does not permit to recognise the provision as there is no obligation to incur this cost until the five years have elapsed. Over the first four years this is a future obligation which can be avoided by the simple means of
selling the lease to someone else. Is It right sir.but after 5yr has elapsed and they haven’t repainted the property yet, at that time will we create provision by the estimated amount. Am i right sir.
Hi,
Yes, the key is that there needs to be a present obligation, and there is currently no obligation to paint it until the end of five years.
When we repaint it in five years time the expense will just be recognised as an expense through profit or loss.
Thanks
@sguha said:
there is a similar past question Shawler
On 1st april 2012, the govt. introduces a legislation which had the effect of requiring Shawler to fit anti-pollution filter to its furnace in 2 yrs.Whether shawler need to provide provision for cost of the filter on Sep 2012.Now we know it is a future obligation cause the effect is not binding until 2 yrs has elapsed. and also shawler can avoid it by selling of that business. So no need to create the provision.
My question is what after the 2 yr has elapsed and shawler hasnt yet fitted the filter. That time will we create a provision with the cost of filter?
answer says if then also no need of provision why is it so?
Hi,
This is an odd one but the standard argues that we can break the law, hence no need to make the provision, but if that is the case then we would need to provide for the fines.
I’d just remember this one as a quirk in the standard.
Thanks
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