The 2012 IFRS-based balance sheet published by Volkswagen AG, a well-known German automaker, listed an account called “provisions” (divided into current and non-current categories) with a total balance (in million euros) of 31,062 (2012) and 29,240 (2011). The footnotes to the financial statements included the following statement and account information:
In accordance with International Accounting Standard (IAS) 37, provisions are recognized where a present obligation exists to third parties as a result of a past event; where a future outflow of resources is probable; and where a reliable estimate of that outflow can be made. Provisions . . . are recognized at their (expected) settlement value discounted to the balance sheet date. Discounting is based on market interest rates.
December 31, 2011, balance: ........ 29,240
Increases ................ 13,917
Decreases ................. (12,095)
December 31, 2012, balance ......... 31,062
a. Discuss differences between how provisions are accounted for under IFRS and how contingencies are accounted for under U.S. GAAP.
b. Explain how the increases listed above (13,917) affected the basic accounting equation, and list what kinds of items might be reflected in the 13,917 increase amount.
c. Explain how the decreases listed above (12,095) affected the basic accounting equation, and list what kinds of items might be reflected in the 12,095 decrease amount.