The definition of a liability forms an important element of the International Accounting Standards Board's Framework for
Question:
The definition of a liability forms an important element of the International Accounting Standards Board's Framework for the Preparation and Presentation of Financial Statements which, in turn, forms the basis for HKAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Consider the following situations, all are independent:
1. Prior to reporting date, the board of an enterprise decided to close down a division. The future costs of implementing the close down, including redundancy costs and cost of disposing the division's plant and equipment as well as inventory have been estimated by the finance director. Up to the year ended date, neither the decision to close down the division nor the redundancy arrangements for employees have been communicated to any of those employees affected and no other steps have been taken to implement the decision.
2. During the current year, the enterprise filed a lawsuit against its business partner for breach of contract. The enterprise's legal counsel estimates that a favorable settlement is highly probable.
3. During the current year, 10 employees died after a plant explosion, possibly as a result of lack of equipment maintenance or safety procedures at the plant by the enterprise. Legal proceedings have been started seeking damages from the enterprise but it disputes liability. Up to reporting date, the enterprise lawyers have advised that it is probable that the enterprise would be found liable. But they have also advised that it is almost impossible to estimate the amount of compensation the court might award against the company or how long it might take to exhaust all the legal avenues before a final court decision is reached in this case.
4. The Hong Kong government introduces a number of changes to the income tax system.As a result of these change, the enterprise in the financial service sector, will need to retrain a large proportion of its administration and sales workforce in order to ensure continued compliance with financial service regulation. At the reporting date, no retaining of staff has taken place.
5. The enterprise, a retail store, has a policy of refunding purchases by dissatisfied customers even though it is under no legal obligation to do so, its policy of making refund is generally known.
Required
For each of above situation, explain the rationale of your decision whether a provision should be recognized, a contingent liability or contingent asset should be disclosed or nothing should be accounted for.
Financial Accounting
ISBN: 9780730363217
10th Edition
Authors: John Hoggett, John Medlin, Keryn Chalmers, Claire Beattie, Andreas Hellmann, Jodie Maxfield