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Chapter 15

Example 2

Restructuring

On 16 December 20X6 the directors of Musa approve a program of
restructuring involving the redundancy of a large number of staff at a total
cost of $400,000, together with the retraining of remaining staff at a cost of
$200,000. Some of the remaining staff will need to be relocated at a cost of
$150,000.

On 6 January 20X9, shortly after the company’s year-end of 31 December
20X8, the directors announced the restructuring program to their staff,
identifying those to be made redundant.

The financial controller is unsure whether the announcement on 6 January
20X9 represents an adjusting event under IAS 10 Events After the Reporting
Period, and whether she should create a provision for the restructuring costs
of $750,000.

Advise the Financial Controller as to whether a provision should be
created.

Solution

The announcement is a non-adjusting event as it does not provide evidence
of a condition existing at the reporting date.

In order to create a provision there needs to be an obligation, which can
either be legal or constructive. A constructive obligation would be created by
communicating details of the restructuring to those affected and thus creating
a valid expectation of payment. As at 31 December 20X8 Musa had not
communicated details of the scheme to the employees so there would be no
obligation and thus no provision.

Even if the employees involved had been informed, the provision would be
restricted to the redundancy costs of $400,000, and would not include costs
of the ongoing business, such as any retraining and relocation expenses.

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