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below is the question.
“Awdry Co currently estimates that the total
penalty payable as a result of the breach will be $1.3 million which it expects to
repay in equal annual instalments over the next ten years with the first payment
falling due on 1 May 20X5. The company’s draft statement of profit or loss for
the current year recognises an expense of $1.3 million and the draft statement
of financial position includes a liability for the same amount.Evaluate the client’s accounting treatments and the difficulties which you might
encounter when auditing each of the accounting estimates described above”MY QUERY :
the model answer has discussed the need of time value of money as per IAS37 but i was also wondering if the company has to expense the full 1.3 million ins SOFP in first year if it plans to split it in 10 installments.Also in liabilities should the liability not be split int current and non current.
Kindly advise.
The PV of $0.13m payments over 10 years gives the amount to be initially recognised as expense and liability. At each reporting date, the liability will be split current (the next payment)/non-current (the remainder).
The pattern of payments does not change the fact that this is all expense (a penalty for a breach that has occurred).
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