Restructuring is an action taken by a company to significantly modify the financial and operational aspects of the company. A restructuring can comprise numerous costly activities, including termination or relocation of a business, a change in management structure and lay-offs. 

 

IFRS (IAS 37.72 specifically) require companies to recognize restructuring provisions (i.e., liability) and restructuring costs (i.e., expense) before the restructuring actually occurs, when “a detailed formal plan is adopted and has started being implemented, or announced to those affected”.

 

Requirements:

 

Using the conceptual framework, discuss

 

a) What are the definition of liability and the recognition criteria of liability?

b) Based on your discussion of part a), why does IAS 37.72 require a provision (i.e., liability) to be recognized when a company plans to close their business locations (i.e., before the actual closure) and only when “a detailed formal plan is adopted and has started being implemented, or announced to those affected”?

c) What is the impact of recording restructuring provisions on the company’s financial statement?

The shareholders and the investors get to know the actual position and the plans of the company to make better decision weather or not to invest in the company. It makes the financial statement more reliable and faithful to its investors and users.

Answer rating: 100% (QA)

Solution 1 Liabilities are the present obligation of the entity in the form of legally enforceable a... View the full answer