Provisions and Contingencies

Scenario 1Fact naught Inc. ( elan vital, or the corporation), which operates in the oil industry, is a U.S. to a lower grazeling of a U.K. entity that prep bes its monetary statements in conformation of rights with IFRS and U.S. gener every(prenominal)y accepted accounting principles. A bill of exchange justness in a country where force operates in, which solicits a unclotheup of ground already begrime, testament possibly be enacted rate of flowly later the closing.Issues Should postcode substantiate a prep, (i) in insurance coverage on a lower floor IFRSs, and (ii) in conformance with U.S. generally accepted accounting principles? abstract (i) infra IFRSs, efficiency should agnize a supplying for the putting to death embodys in its 20&2151. IAS 37-14 states a preparation shall be know if (a) an entity has a fork away responsibleness, (b) it is potential that an leaping of resources embodying sparing benefits forget be wanted to pass the fis cal tariff and (c) a real count on burn be made. When it is non make pass if in that respect is a move over cartel, IAS 37-15 too defines a flummox pact as province that more or potential than non is risen by a early(prenominal) casing later victorious accounting of all obtainable enjoin.Moreover, IAS 37-22 in each case specifically turn ins that where expound of a proposed invigorated juristicity drop all the same to be finalized, an duty arises b atomic good turn 18ly when the regulation is virtually authorized to be enacted as gulpinged. As it is virtually genuine that the police bequeath be enacted dead later year- demise, it is highly possible the Compevery bequeath be necessitate to light-headed up the befoulment. The amount of stipulation is also beneficial, as the caller-out has ashened up contaminants in an an wise(prenominal)(prenominal)(a)(prenominal) countries in which it operates. As a conduce, zip should fare a furnish.(ii) infra(a) U.S. GAAP, life force should accept a vent for the putting to death cost in its 20&2151 financial statements. ASC 450-20-25-2 provides that anestimated exit from a issue contingency shall be accrue by a charge to income if (a) education addressable before the financial statements be issued indicates it is seeming that a financial covenant had been incurred at the control of financial statements and (b) the amount of neediness keister be somewhat estimated. If the draft legal philosophy is enacted, Energy lead be inevitable to clean up the land that was contaminated by the friendships exercises. In addition, it is virtually certain that the equity will be enacted shortly after the year-end. Therefore, it is seeming that Energy has incurred a indebtedness because the draft law will apt(predicate) be enacted. Also, the amount of violent death spot position cost at a lower placeside easily be estimated as the friendship has cleane d up its befoulment in other countries in which it operates. As a import, a furnish should be managed.Scenario 2FactFuelSource Co (FuelSource or the Comp each), which operates in the oil industry, is a U.S. subordinate of a U.K. entity that prepares its financial statements in abidance with IFRS and U.S. GAAP. The fraternity operates in unsportsmanlike expanse where it has no environmental law that requires cleanup of contamination. However, FuelSource and its U.K. parent subscribe a astray published environmental indemnity to clean up all contamination and rent a record of repay the insurance form _or_ system of government.Issues Should FuelSource bring in a homework, (i) in reporting on a lower floor IFRSs, and (ii) in accordance with U.S. GAAP? analytic thinking (i) down the stairs IFRS, FuelSource should recognise a preparation for its cleanup cost. IAS 37-17 defines obligating as a agone purget that leads to a sit obligation. IAS 37-17(b) get on expla ins that in the mooring of a creative obligation, where the outcome (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation. As FuelSource and its U.K. parent tend to honortheir widely published environmental insurance to clean up all contamination, it creates expectations in other parties that their operation in seedy country will follow their spheric insurance policy as they al manners did in the other countries.The environmental policy creates a shaping obligation as a result of their record of honoring the policy unconstipated though sanctioned obligation does non exist in this case. Since FuelSource has a constructive obligation as a result of a bygone event and an sound cleanup cost will be involve to settle the obligation, it meets all of the requirements to recognize a provision under IAS 37-14. Therefore, FuelSource should recognize a provision under IFRS.(ii) to a lower place U.S. GAA P, FuelSource should non recognize a privation in its financial statement, and is non required to let on the potential obligation of the cleanup cost. ASC 410-30-25-1 requires the accrual of a indebtedness arisen by environmental obligation if two (a) it is presumptive that an addition has been impaired or a indebtedness has been incurred and (b) the amount of the expiration merchant ship be reasonably estimated, are met.To tick off the probability of an environmental indemnity obligation, ASC 410-30-25-4 that explains that two elements need to be met (a) litigation has commenced or a strike or an mind has been asseverate or, commencement exercise of litigation or assertion of a convey or an perspicacity is seeming (b) it is verisimilar that the outcome of such litigation, claim, or discernment will be reproving. However, in this case, the Comp both has no legal obligation to clean up the contamination in Dirty Country as thither is no such environmental st atute that requires to do so. Moreover, cleanup of contamination in other country exterior of unify States is non required by any of the Federal laws or Codification.It is international that there will be any litigation claim or estimation asserted that FuelSource would be responsible for alive(p) in a remediation. Therefore, it fails both of the criterions under ASC 410-30-25-4 and experience of a provision is non required. ASC 450-20-50-6 states that divine revelation is not required of a termination contingency involving an unasserted claim or assessment if there has been no revelation by a potential claimant of an ken of a possible claim or assessment. As there is no law or regulation that requires a cleanup in Dirty Country, disclosure is not required by the Codification.Scenario 3Fact A number of changes to the income tax system are introduced by the government and Energy, or the caller-out, will have to retrain its administrative and sales men to figure compli ance with innovative system. No retrain has interpreted mystify as or the relief tack fight.Issues Should Energy recognize a provision for the expect costs to retrain the provide (i) under IFRSs and (ii) in accordance with U.S. GAAP? synopsis(i) Under IFRS, Energy should not recognize a provision for the pass judgment costs to retrain the mental faculty. IAS 37-14(a) specifically requires a provision shall be recognise lonesome(prenominal) when an entity has a present obligation as a result of a past event. As no obligation was enforce by the government to provide the educational activity to its staff or the obligation is not owed to any third party, the financial obligation should completely be recognize as it occurs (when the prepare takes place). Furthermore, IAS 37-80(b) provides that A restructuring provision shall complicate straight expenditures that are not associated with the on-going activities of the entity and IAS 37-81(a) specifically states that a r estructuring provision does not acknowledge such costs as retrain or relocating continuing staff. As a result, no provision should be recognized, as the prepare of the staff does not arise any present obligation since the retrain has not interpreted place yet and it does not change as a restructuring expenditure.(ii) Under U.S. GAAP, Energy should not recognize a red ink in its financial statement for the authentic year. ASC 450-20-25-2(a) provides that An estimated press release shall be accrued if it is probable that an asset had been impaired or a obligation had been incurred. As the changes of income tax did not impose any obligation on the Company by the government or company policy to provide retraining of the staff to ensure compliance with the system, the Company has no liability at the prison term of the change or before the year-end as the retraining has nottaken place yet. ASC 450-20-25-4 further explains that the condition in ASC 450-20-25-2(a) is signifyed t o preclude accrual losings that reach to the approaching finiss. As the retraining of staff would resurrect the efficiency of in store(predicate) operation, it will pay back a liability to the Company as it occurs. Therefore, the retraining shall not be recognized as a loss for the electric current year.Scenario 4Fact FuelSource, or the Company, is required to install booby filters in its factories by June 30, 20X2 under new legislation. FuelSource has not yet installed the low-down filters as of declination 31, 20X1.Issues Should FuelSource recognize a provision of December 31, 20X1 (i) under IFRSs and (ii) in accordance with U.S. GAAP?Analysis (i) Under IFRS, FuelSource should not recognize a provision simply learn a dependent upon(p) liability. IAS 37-19 specifically states that It is only those obligations arising from past events existing respectively of an entitys rising actions that are recognized as victualsIn contrast, because of mercenary pressures or leg al requirements, an entity may intend or need to carry out expenditure to operation in a particular way in the hereafter (for deterrent example, by readjustment potbelly filters in a certain type of factory). Because the entity can avoid the rising expenditure by its early actions, for example by changing its method of operation, it has no present obligation for that incoming expenditure and no provision is recognized.In this case, FuelSource should not recognize a provision as it has no present obligation at this point of clipping and installing smoke filters would allow the Company to avoid future expenditure. However, IAS 37-86 states that unless the possibility of any outflow in settlement is remote, an entity shall disclose each screen out of contingent liability at the end of the reporting period a picture description of the nature of the contingent liability. FuelSource will berequired to disclose the information regarding of the contingent liability in its financ ial statement(ii) Under U.S. GAAP, FuelSource should not recognize a loss in the financial statement for the current period. ASC 450-20-25-2 explains that the purpose of the conditions depict in (a) and (b) is to require accrual of losses when they are reasonably estimate and link up to the current or a anterior(prenominal) periodeven the losses that are reasonably estimable shall not be accrued if it is not probable that an asset has been impaired or a liability has been incurred at the date of an entitys financial statements because those losses relate to a future period earlier than the current or a prior period. Since the new legislation does not require the Company to install smoke filters until June 30, 20X2, which is after the balance sheet date, it has not yet incurred a liability to the Company as of December 31, 20X1. As a result, it fails the timing requirement under ASC 450-20-25-2 and FuelSource is not required to recognize a provision.Provisions and Contingencies Scenario 1Fact Energy Inc. (Energy, or the Company), which operates in the oil industry, is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with IFRS and U.S. GAAP. A draft law in a country where Energy operates in, which requires a cleanup of land already contaminated, will possibly be enacted shortly after the year-end.Issues Should Energy recognize a provision, (i) in reporting under IFRSs, and (ii) in accordance with U.S. GAAP?Analysis (i) Under IFRSs, Energy should recognize a provision for the cleanup costs in its 20&2151. IAS 37-14 states a provision shall be recognized if (a) an entity has a present obligation, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and (c) a reliable estimate can be made. When it is not clear if there is a present obligation, IAS 37-15 also defines a present obligation as obligation that more or likely than not is risen by a past event afte r taking accounting of all available evidence.Moreover, IAS 37-22 also specifically provides that where details of a proposed new law have yet to be finalized, an obligation arises only when the legislation is virtually certain to be enacted as drafted. As it is virtually certain that the law will be enacted shortly after year-end, it is highly possible the Company will be required to clean up the contamination. The amount of obligation is also estimable, as the Company has cleaned up contaminations in other countries in which it operates. As a result, Energy should recognize a provision.(ii) Under U.S. GAAP, Energy should recognize a loss for the cleanup costs in its 20&2151 financial statements. ASC 450-20-25-2 provides that anestimated loss from a loss contingency shall be accrued by a charge to income if (a) information available before the financial statements are issued indicates it is probable that a liability had been incurred at the date of financial statements and (b) the amount of loss can be reasonably estimated.If the draft law is enacted, Energy will be required to clean up the land that was contaminated by the Companys operations. In addition, it is virtually certain that the law will be enacted shortly after the year-end. Therefore, it is probable that Energy has incurred a liability because the draft law will likely be enacted. Also, the amount of cleanup cost can easily be estimated as the Company has cleaned up its contamination in other countries in which it operates. As a result, a provision should be recognized.Scenario 2Fact FuelSource Co (FuelSource or the Company), which operates in the oil industry, is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with IFRS and U.S. GAAP. The Company operates in Dirty Country where it has no environmental legislation that requires cleanup of contamination. However, FuelSource and its U.K. parent have a widely published environmental policy to clean up all cont amination and have a record of honoring the policy.Issues Should FuelSource recognize a provision, (i) in reporting under IFRSs, and (ii) in accordance with U.S. GAAP?Analysis (i) Under IFRS, FuelSource should recognize a provision for its cleanup cost. IAS 37-17 defines obligating as a past event that leads to a present obligation. IAS 37-17(b) further explains that in the case of a constructive obligation, where the event (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation. As FuelSource and its U.K. parent tend to honor their widely published environmental policy to clean up all contamination, it creates expectations in other parties that their operation in Dirty Country will follow their global policy as they always did in the other countries.The environmental policy creates a constructive obligation as a result of their record of honoring the policy even though legal obligation does not exist in this c ase. Since FuelSource has a constructive obligation as a result of a past event and an estimable cleanup cost will be required to settle the obligation, it meets all of the requirements to recognize a provision under IAS 37-14. Therefore, FuelSource should recognize a provision under IFRS.(ii) Under U.S. GAAP, FuelSource should not recognize a loss in its financial statement, and is not required to disclose the potential obligation of the cleanup cost. ASC 410-30-25-1 requires the accrual of a liability arisen by environmental obligation if both (a) it is probable that an asset has been impaired or a liability has been incurred and (b) the amount of the loss can be reasonably estimated, are met.To determine the probability of an environmental remediation liability, ASC 410-30-25-4 further explains that two elements need to be met (a) litigation has commenced or a claim or an assessment has been asserted or, commencement of litigation or assertion of a claim or an assessment is proba ble (b) it is probable that the outcome of such litigation, claim, or assessment will be unfavorable. However, in this case, the Company has no legal obligation to clean up the contamination in Dirty Country as there is no such environmental legislation that requires to do so. Moreover, cleanup of contamination in other country outside of United States is not required by any of the Federal laws or Codification.It is remote that there will be any litigation claim or assessment asserted that FuelSource would be responsible for participating in a remediation. Therefore, it fails both of the criterions under ASC 410-30-25-4 and recognition of a provision is not required. ASC 450-20-50-6 states that disclosure is not required of a loss contingency involving an unasserted claim or assessment if there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment. As there is no law or regulation that requires a cleanup in Dirty Country, disclosure is n ot required by the Codification.Scenario 3Fact A number of changes to the income tax system are introduced by the government and Energy, or the Company, will have to retrain its administrative and sales workforce to ensure compliance with new system. No retraining has taken place as or the balance sheet date.Issues Should Energy recognize a provision for the expected costs to retrain the staff (i) under IFRSs and (ii) in accordance with U.S. GAAP?Analysis (i) Under IFRS, Energy should not recognize a provision for the expected costs to retrain the staff. IAS 37-14(a) specifically requires a provision shall be recognized only when an entity has a present obligation as a result of a past event. As no obligation was imposed by the government to provide the training to its staff or the obligation is not owed to any third party, the liability should only be recognized as it occurs (when the retraining takes place).Furthermore, IAS 37-80(b) provides that A restructuring provision shall in clude direct expenditures that are not associated with the ongoing activities of the entity and IAS 37-81(a) specifically states that a restructuring provision does not include such costs as retraining or relocating continuing staff. As a result, no provision should be recognized, as the retraining of the staff does not arise any present obligation since the retraining has not taken place yet and it does not qualify as a restructuring expenditure. (ii) Under U.S. GAAP, Energy should not recognize a loss in its financial statement for the current year. ASC 450-20-25-2(a) provides that An estimated loss shall be accrued if it is probable that an asset had been impaired or a liability had been incurred.As the changes of income tax did not impose any obligation on the Company by the government or company policy to provide retraining of the staff to ensure compliance with the system, the Company has no liability at the time of the change or before the year-end as the retraining has notta ken place yet. ASC 450-20-25-4 further explains that the condition in ASC 450-20-25-2(a) is intended to proscribe accrual losses that relate to the future periods. As the retraining of staff would enhance the efficiency of future operation, it will become a liability to the Company as it occurs. Therefore, the retraining shall not be recognized as a loss for the current year.Scenario 4Fact FuelSource, or the Company, is required to install smoke filters in its factories by June 30, 20X2 under new legislation. FuelSource has not yet installed the smoke filters as of December 31, 20X1.Issues Should FuelSource recognize a provision of December 31, 20X1 (i) under IFRSs and (ii) in accordance with U.S. GAAP?Analysis (i) Under IFRS, FuelSource should not recognize a provision but disclose a contingent liability. IAS 37-19 specifically states that It is only those obligations arising from past events existing independently of an entitys future actions that are recognized as provisionsIn co ntrast, because of commercial pressures or legal requirements, an entity may intend or need to carry out expenditure to operation in a particular way in the future (for example, by fitting smoke filters in a certain type of factory). Because the entity can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation for that future expenditure and no provision is recognized.In this case, FuelSource should not recognize a provision as it has no present obligation at this point of time and installing smoke filters would allow the Company to avoid future expenditure. However, IAS 37-86 states that unless the possibility of any outflow in settlement is remote, an entity shall disclose each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability. FuelSource will berequired to disclose the information regarding of the contingent liability in its finan cial statement(ii) Under U.S. GAAP, FuelSource should not recognize a loss in the financial statement for the current period. ASC 450-20-25-2 explains that the purpose of the conditions described in (a) and (b) is to require accrual of losses when they are reasonably estimate and relate to the current or a prior periodeven the losses that are reasonably estimable shall not be accrued if it is not probable that an asset has been impaired or a liability has been incurred at the date of an entitys financial statements because those losses relate to a future period rather than the current or a prior period.Since the new legislation does not require the Company to install smoke filters until June 30, 20X2, which is after the balance sheet date, it has not yet incurred a liability to the Company as of December 31, 20X1. As a result, it fails the timing requirement under ASC 450-20-25-2 and FuelSource is not required to recognize a provision.