Page 36 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

Requirements of IAS 37 Provisions
IAS 37 covers the accounting for assets and liabilities of uncertain timing or amount.

IAS 37 only allows provisions to be recognised when all of the following criteria are met:
▪ A present obligation exists as a result of a past event
▪ A probable outflow of economic benefit will be required to settle the obligation
▪ A reliable estimate of the amount of the obligation can be made.

Where the above criteria are not met, the situation is classed as a contingent liability. Contingent
liabilities are disclosed in the notes to the financial statements. However, if there is a remote
chance of there being an outflow of economic benefits then the situation is ignored altogether in
the financial statements.

Contingent assets are possible assets as a result of a past event. IAS 37 requires them to be
disclosed where it is probable that there will be an inflow of economic benefits. However, if it is
only possible or less likely it should be ignored.

Application to Grapple
Health & safety in the workplace is an important issue for Grapple as it prides itself in taking care
of its employees. As Grapple operates a manufacturing business, there is always the risk of an
employee suffering injury as a result of a workplace accident, for which they may seek financial
compensation.

Other possible sources of obligations, which may result in the need to recognise provisions,
include:

● Compensation or refunds due to customers who suffer illness as a result of drinking a
Grapple product which, for some reason, is not fit for human consumption. This could arise,
for example, following a failure of the quality control processes designed to ensure the
quality and safety of products.
● Repayment of all or part of grants received if any ongoing eligibility criteria to receive the
grant are no longer complied with.
● Breach of environmental regulations particularly if older, less efficient, PPE is operated.

As noted previously in relation to IAS 20, there may be contingent liabilities if Grapple has
received grants or subsidies which are conditional upon ongoing compliance with specified
criteria. If it is probable that financial assistance may need to be repaid, and it can be reliably
measured, it will meet the definition of a provision and should be recognised in the financial
statements. If it is regarded as only possible, it should be disclosed in the notes to the financial
statements.

Requirements of IAS 21 re foreign currency transactions
Transactions in a foreign currency are initially translated at the spot rate in force at the date of
the transaction. When transactions are settled, such as when the supplier is paid after having
purchased goods on credit, the payment is also translated at the spot rate in force at the date of

86 KAPLAN PUBLISHING