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I am not sure whether I should make a provision in the following circumstances or not:
ii) In one of the countries in which Beta plc operates, new legislation has been passed on 1 January 2012 (beginning of the financial year) which will require that the workers of Beta plc wear special protective gear; the new legislation will come into force in 2 years. At the end of the financial year, 31 December 2012, Jack has not yet bought the new protective gear which is expected to cost £4 million.
A: I would be inclined to say that Beta plc should provide as this is a legal obligation, unless they would want to close the division on that country if this would be too expensive for them, however, I suppose the cost of £4 million exceeds the benefits that Beta plc gets from that country and therefore, they should stay there and provide for the new protective gear.
What do you think?
iii) The company owns a fleet of trucks which require annual service. This always happens at the beginning of each year and it is expected that this would also be the case for 2013; the service cost is estimated at £400,000.
A: I would say that they should not provide as this is sort of a “future operating loss” or is it not?
(iv) The company is in a dispute with one of its suppliers concerning a situation that occurred last year. There is a possible obligation on Beta plc arising from this dispute. A legal case concerning this dispute is currently proceeding; the company’s lawyers believe that it is likely that the company will win the case which means that no outflow of resources will be required.
A: I think Beta plc should not provide for it because the lawyers say it is likely that the company will win the case and this is an authorised opinion – not sure what “is likely” means, but I suppose it means PROBABLE, not POSSIBLE, right?
ii) (What happened to “i)”?) you have cost and benefits the wrong way round I believe “however, I suppose the cost of £4 million exceeds the benefits that Beta plc gets from that country ”
You have no grounds for making that assumption and there is no legal obligation on Jack to continue operating. Therefore, no provision
iii) Why provide for the annual expense? I presume that Beta is trying to include as an expense in 2012 the costs of the 2013 service! What happened at the start of 2012? Were those costs included as a provision in 2011? Surely you can only have one annual charge in each year
iv) You’re correct in that it would not be appropriate to provide. The question is long-winded – all you needed to know was “There is a possible obligation” – if it’s only possible, then the chance of it happening is lower than the chance of it not happening and therefore not appropriate to provide
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