case 12-3

1831 words 8 pages
Provisions and Contingencies

Scenario 1

Fact: Energy Inc. (Energy, or the Company), which operates in the oil industry, is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with IFRS and U.S. GAAP. A draft law in a country where Energy operates in, which requires a cleanup of land already contaminated, will possibly be enacted shortly after the year-end.

Issues: Should Energy recognize a provision, (i) in reporting under IFRSs, and (ii) in accordance with U.S. GAAP?

Analysis: (i) Under IFRSs, Energy should recognize a provision for the cleanup costs in its 20x1. IAS 37-14 states a provision shall be recognized if “(a) an entity has a present obligation, (b) it is probable that an
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ASC 450-20-50-6 states that “disclosure is not required of a loss contingency involving an unasserted claim or assessment if there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment”. As there is no law or regulation that requires a cleanup in Dirty Country, disclosure is not required by the Codification.

Scenario 3

Fact: A number of changes to the income tax system are introduced by the government and Energy, or the Company, will have to retrain its administrative and sales workforce to ensure compliance with new system. No retraining has taken place as or the balance sheet date.

Issues: Should Energy recognize a provision for the expected costs to retrain the staff (i) under IFRSs and (ii) in accordance with U.S. GAAP?

Analysis: (i) Under IFRS, Energy should not recognize a provision for the expected costs to retrain the staff. IAS 37-14(a) specifically requires “a provision shall be recognized only when an entity has a present obligation as a result of a past event”. As no obligation was imposed by the government to provide the training to its staff or the obligation is not owed to any third party, the liability should only be recognized as it occurs (when the retraining takes place). Furthermore, IAS 37-80(b) provides that “A restructuring provision shall include direct expenditures that are not associated with the


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