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Which of the following would require a provision for liability to be created by BW at its reporting date of 31 Oct 20X5?
a) Government introduced new laws on data protection which come into force on 1 Jan 20X6. Bw’s directors have agreed that this will require a large number of staff to be retrained. At 31 oct 20×5 directors were waiting on a report they had commissioned that would identify the actual training requirments
b) At Y/E BW is negotiating with its insurance provider about an outstanding insurance claim. On 20 Nov 20X5 provider agreed to pay $200000
c) Bw makes refund to customers for any goods returned within 30 days of sale and has done so for many years
d) A customer is suing BW for damages alleged to have been caused by BW’s product. BW is contesting the claim and at 31 Oct 20X5 the directors have been advised by BW’s legal advisors that it is very unlikely to lose the case.
Sir correct ans is C. But please can you explain that why c is correct and why a, b and d are wrong?
Hi,
a) We have until 1 Jan X6 to do the retraining so there is as yet no obligation to have staff retrained and until we know the results of the report to know what is required, how could we measure it. We couldn’t.
b) Is that not us receiving the cash and therefore a contingent asset.
c) We have a constructive obligation due to the past behaviour.
d) We are unlikely to lose the case and so it is not probable that there will be any outflow of economic benefit and no provision.
Remember we have to have a present obligation as a result of a past event, a probable outflow of economic benefit and to be able to measure the amounts reliably to make the provision.
Thanks
Sir in the below scenerio we know that there is no present obligation, but is there a possible obligation here?
“Government introduced new laws on data protection which come into force on 1 Jan 20X6. Bw’s directors have agreed that this will require a large number of staff to be retrained. At 31 Oct 20×5 directors were waiting on a report they had commissioned that would identify the actual training requirements”
Reporting date is 31 oct 20×5
Hi,
At 31 Oct 20X5, we are not obliged to comply with the laws so no provision is required as there is no present obligation.
Thanks
Yes sir I agree that there is no present obligation here, but is this a possible obligation (contingent liability)?
Sir in a similar question, its mentioned that H co is subsidiary of P co. H co SOPF includes loan of 25000 that is repayable in 5 years time. 15000 of this loan is secured on H’s property and remaining 10000 is guaranteed by P co in event of default by H co. It is possible that H co will be unable to pay the loan but not likely
Sir here in solution they have said that 10000 will be treated as contingent liability in P co individual F/s. Sir I do not understand that why 10000 is treated as contingent liability in P co individual F/s, can you please explain me
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