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Dear Sir, could you please help me to understand the following cases? especially the second one?
In a review of its provisions for the year ended 31 March 20X5, Cumla’s assistant accountant
has suggested the following accounting treatments:
(i) A provision for one third of the cost of replacing an oven lining, which requires
replacing every three years for technical reasons, and was last replaced on 1 April
20X4.
(ii) The partial reversal (as a credit to the statement of profit or loss) of the accumulated
depreciation provision on an item of plant because the estimate of its remaining useful
life has been increased by three years.
(iii) Providing $1 million for deferred tax at 25% relating to a $4 million revaluation of
property during March 20X5 even though Cumla has no intention of selling the
property in the near future.Which of the above suggested treatments of provisions is/are permitted by IFRS
Standards?Hi,
I can’t just answer the question outright without you showing how you have treated each of the scenarios yourself. If you explain the treatment of each then I can confirm if you are right or wrong, and if wrong I can look to correct you.
It is better to do it this way as it helps your learning.
Look forward to hearing back from you.
Thanks
Sir, Do the partial reversal (as a credit to the statement of profit or loss) of the accumulated
depreciation on an item of plant even creates a provision?Hi,
I think that only (iii) is permitted under IFRS (IAS 12 Deferred Tax).
(i) is not permitted as there is no obligation to replace, plus the asset could be sold in the time period and so no provision required.
(ii) is not permitted as a change in useful life of an item of PPE is a change in estimate and so accounted for by spreading the carrying value over the new remaining useful life, there is no adjustment to what has happened in the past.
(iii) the revaluation increases the CV of the asset and so creates a larger temporary difference than we previous had and so an increased deferred tax liability, even though we will not sell it there is a gain in OCI that requires an associated tax adjustment to match the tax to the period in which it relates.
Thanks
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