Question Three

i)	Explain the circumstances under which a provision should be recognized in the financial statements according to IAS 37 Provisions, contingent liabilities and contingent assets. Tyre requires customers to pay a deposit of 20% of the purchase price when
ii)

placing an order for a vehicle. If the customer cancels the order, the deposit is not refundable and Tyre retains it. If the order cannot be fulfilled by Tyre, the company repays the full amount of the deposit to the customer. The balance of the purchase price becomes payable on the delivery of the vehicle when the title to the goods passes. Tyre proposes to recognize the revenue from the deposits immediately and the balance of the purchase price when the goods are delivered to the customer. The cost of sales for the vehicle is recognized when the balance of the purchase price is paid. Additionally, Tyre had sold a fleet of cars to Hub and gave Hub a discount of 30% of the retail price on the transaction. The discount given is normal for this type of transaction. Tyre has given Hub a buyback option which entitles Hub to require Tyre to repurchase the vehicles after three years for 40% of the purchase price. The normal economic life of the vehicles is five years and the buyback option is expected to be exercised Required: (a) Advise the directors on how to treat the above item. (b) Explain concept of substance over form iii) Tyre has entered into two new long lease property agreements for two major retail outlets. Annual rentals are paid under these agreements. Tyre has had to pay a premium to enter into these agreements because of the outlets location. Tyre feels that the premiums paid are justifiable because of the increase in revenue that will occur because of the outlets location. Tyre has analysed the leases and has decided that one is a finance lease and one is an operating lease but the company is unsure as to how to treat this premium. Required: Advise the directors on how to treat the above item. (20 Marks)