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Chapter 11
2.4 Measurement
Provisions should be measured at the best estimate of the expenditure required to
settle the obligation as at the reporting date.
The best estimate of a provision will be:
for a single obligation: the most likely amount payable
for a large population of items: the expected value.
If the effect of the time value of money is material, then the provision should be
discounted to present value.
Example 2
New legislation
A new law was introduced in February 20X5 requiring Ivy to immediately
replace some of its older machines with newer models that are compliant with
new fire-safety legislation. By the reporting date, Ivy had not replaced the
machines. It is estimated that the cost of replacing the machines is
approximately $1 million. Non-compliance with this law is expected to result in
fines.
Ivy requires advice about the accounting repercussions of the new legislation.
Discuss the correct accounting treatment of the above in the financial
statements for the year ended 31 October 20X5.
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