14. NBAA NOV 2016
(a) IAS 37 Provision, Contingent Liabilities and Contingent Assets I an important
standard regulating the recognition of liabilities and the use of provisions. It has
been especially useful in controlling the abuse of provisions to manage reported
earnings.
Required:
Define a provision and discuss in details the three conditions that must be
satisfied in order for a provision to be recognised under IAS 37.
(b) The following transactions and events should be recorded/reported by Hamisa
plc in compliance with the requirements of IAS 37:
(i) A decision was taken by the board of Hamisa plc shortly before the year end
to close down a division. The costs of the closure are estimated to total TZS.30
billion. The decision was announced in principle, but detailed implementation
plans have not been made yet.
(ii) Hamisa plc has traditionally repainted its premises every five years. The next
painting is due in one year’s time. The entity proposes to accrue
TZS.22,000,000 as a provision for the expected cost of repainting the
premises.
(iii) Hamisa plc has sold 5,000 units of a product to customers during the past 12
months with a year’s warranty attended. Past experience has shown that 3%
of goods sold require repair within the warranty period at an average cost of
TZS.200,000 per unit.
(iv) Hamisa plc has guaranteed the debts of its associate company up to a
maximum amount of TZS.3 billion. 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.
Required:
Discuss briefly how each of the above transactions and events should be
recorded/reported as per IAS 37. Show journal entries where relevant, and state
the reason(s) for the proposed