Kojach Ltd is a manufacturing company which prepares its financial statements in compliance with International Financial Reporting Standards (IFRS). The following transactions took place for the year ended 31 March, 2017.
Required:
Discuss briefly how each of the transactions and events below should be recorded by Kojach Ltd in compliance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
i) Kojach Ltd has traditionally repainted its premises every five years. The next painting is due in a year’s time. The entity proposes to accrue as a provision the expected cost of repainting the premises. (2 marks)
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No present obligation exists to paint the premises, hence the accrual of a provision is not permitted by IAS 37. No contingent liability exists either, unless a commitment has been made to a supplier to carry out the work.
ii) Kojach Ltd has guaranteed the debts of its associate company up to a maximum amount of GH¢3 million. The associate is in excellent financial health and the directors are of the opinion that it is unlikely the guarantee will ever be called in. (3 marks)
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There is a present obligation, as the entity has undertaken to guarantee the debts of another party. However it seems unlikely that this guarantee will be called in. Hence it is not probable at the reporting date that an outflow of resources will be required to settle the obligation. Therefore the second condition has not been met, and no provision should be recognised in the financial statements. If an outflow of resources is judged possible but not remote, disclosure of a contingent liability of GH¢3 million should be made in the notes.