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At a meeting in March 20X5, the board approved the closure of a manufacturing site as part of a company restructure. The cost of the restructure is expected to be $1 million. The restructure was announced to employees in April 20X5.
yr end of the company is 31march 20X5.
maam will a restructuring provision be created at the yr end, in the above scenario?
No – management’s decision is not enough to create an obligation. Since there is no legal obligation to restructure you must be looking for a constructive obligation. To construct an obligation means that management should not be able to get out of it by changing their minds (!) – so they must create a “valid expectation” that the restucturing will happen by communicating it to those affected by it.
ya but maam if you think about it the other way, then provision should be created…
as in half of the criteria for provision was met before yr end(board decision). And post yr end (before authorisation of FSs) new information(announcement of restructuring) becomes aviable about a condition that existed at reporting date, so then based on this understand of IAS 10 i think we should create a provision at yr end date!
your take on this…
DE FACTO there was no constructive obligation at the reporting date – you cannot wish it into existence restrospectively.
Per IAS 37:
A provision for restructuring costs is recognised only when the general
recognition criteria for provisions are met. In this context, a constructive
obligation to restructure arises only when an entity:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees
who will be compensated for terminating their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented; AND
(b) has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main
features to those affected by it.
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