Page 18 - CIMA MCS Workbook May 2019 - Day 2 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

TASK 2 – ACCIDENT ON SITE

Suggested solution

From: Finance Manager
To: Human Resources Officer
Date: Today

Provisions
IAS 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) specify three criteria for
recognition of a provision in financial statements as follows:

 there must be a present obligation (legal or constructive) arising from a past transaction or
event.
 It is probable that there will be a future transfer or outflow of economic benefits, and
 It can be measured reliably.

A legal obligation may arise from operation of law or the terms of a contract. Jord Homes has a
legal obligation to comply with all legislation that applies to the operation of its business
activities. This could be, for example, ensuring that all vehicles and cranes it uses are in good
working order, and that drivers are trained and competent to use the cranes.

Breach of a legal obligation may be established, for example, if a vehicle was determined not to
be roadworthy, or that its mechanical equipment had not been regularly maintained and repaired
to ensure that it was safe to use.

A constructive obligation arises when third parties have a valid expectation that it will be able to
rely upon the statements and behaviour of another party, such that an obligation is created and
should be recognised in the financial statements. If Jord Homes has made public statements
regarding its safety standards or commitment to safety, they may form the basis of a constructive
obligation.

Jord Homes takes staff welfare and safety very seriously and spends a lot of time and money in
training and supervising employees so that the risk of an accident is minimised as far as possible.
In addition, Jord Homes is considered to be an excellent employer and this may lead to the
expectation that it will do more than the bare minimum to achieve compliance with le=gal
obligations.

Therefore, it could be argued that there is a constructive obligation in excess of the legal
obligation to safeguard employees from injury, and to support them as far as possible if an
accident occurs.

A faulty winch mechanism would indicate that it was unsafe and should not have been used. This
is a breach of a legal obligation to have safe systems and processes of work.

It must also be established that there will be a probable outflow of economic benefits as a result
of the breach of a legal obligation. An event is regarded as probable if it is more likely than not to
occur. If a legal or constructive obligation is established, the probable outflow of economic
benefits will derive from the consequences of breach of the obligation. For example, if the crane

102 KAPLAN PUBLISHING