(a) Provisions are particular kinds of liabilities. It therefore

(a) Provisions are particular kinds of liabilities. It therefore follows that provisions should be recognized when the definition of a liability has been met. The key requirement of a liability is a present obligation and thus this requirement is critical also in the context of the recognition of a provision. IAS 37 Provisions, Contingent Liabilities and Contingent Assets deals with this area.

Required:
(i) Explain why there was a need for detailed guidance on accounting for provisions.
(ii) Explain the circumstances under which a provision should be recognised in the financial statements according to IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

(b) World Wide Nuclear Fuels, a public limited company, disclosed the following information in its financial statements for the year ending 30 November 20X9:
The company purchased an oil company during the year. As par t of the sale agreement, oil has to be supplied to the company's former holding company at an uneconomic rate for a period of five years. As a result, a provision for future operating losses has been set up of $135m, which relates solely to the uneconomic supply of oil. Additionally the oil company is exposed to environmental liabilities arising out of its past obligations, principally in respect of soil and ground water restoration costs, although currently there is no legal obligation to carry out the work. Liabilities for environmental costs are provided for when the group determines a formal plan of action on the closure of an inactive site. It has been decided to provide for $120m in respect of the environmental liability on the acquisition of the oil company. World Wide Nuclear Fuels has a reputation for ensuring the preservation of the environment in its business activities. The company is also facing a legal claim for $200 million from a competitor who claims they have breached a patent in one of their processes. World Wide Nuclear Fuels has obtained legal advice that the claim has little chance of success and the insurance advisers have indicated that to insure against losing the case would cost $20 million as a premium.

Required:
Discuss whether the provision has been accounted for correctly under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and whether any changes are likely to be needed under ED IAS 37.

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