Workshop 4 Sem 2 [week 6] Liabilities and Financial Instruments: Questions

Provisions and Contingent Liabilities - QUESTION: Acres

Question 1
The year-end of Acres plc is 31 March 2016. Acres plc is a very diverse group. One of
its consistent features is that it has a reputation as an ethical organisation. Much is
made of the company's policies with regard to recycling, controls over emission of
noxious substances and making use only of renewable resources.
Many of its goods in its beauty and cosmetic range (Radiant Beauty Products) use
ingredients that are sourced overseas and the company publishes full details of its
environmental policies as part of its annual report.
You are the chief accountant of the group and your assistant has prepared draft
accounts for the year ended 31 March 2016. Your assistant, however, is uncertain as to
the application of IAS 37 Provisions, Contingent Liabilities and Contingent Assets to four
material items described below and has requested your advice.
Required
Briefly explain how each of the following issues should be treated in the consolidated
financial statements for the year ended 31 March 2016.
(i) On 12 February 2016 the board of Acres plc decided to close down a large factory in
Salford. The board expects that production will be transferred to other factories. No
formal plan has yet been drawn up but it is expected the closure will occur on 31
August 2016. As at the balance sheet date this decision has not been announced to
the employees or to any other interested parties. The overall costs of this closure
are foreseen as 79 million.
(ii) During last November one of the subsidiary companies moved from France to
Salford. It holds its buildings in France under an operating lease which runs until 31
March 20Y7. Annual rentals payable on the property in France are 8 million. Acres
plc is unable to cancel the lease. It is attempting to rent out the premises at a
commercial rent, but the directors have been advised that the chances of achieving
this are less than 50%.
(iii) During the year to 31 March 2016, a customer started legal proceedings claiming
one of the products from the 'Radiant Beauty' range had caused a skin complaint.
The group's lawyers have advised that the chances of this action succeeding are
remote.
(iv) The group has an overseas subsidiary Spetse that is involved in mining certain
minerals. These activities cause significant damage to the environment, including
deforestation. The company expects to abandon the mine in eight years time. The
country where the subsidiary is based has no environmental legislation obligating
companies to rectify environmental damage and it is unlikely that such legislation
will be enacted within the next eight years. It has been estimated that the cost of
putting right the site will be 10 million if the tree re-planting were successful at the
first attempt, but it will probably be necessary to have a further attempt costing an
additional 5 million.
(v) Acres sells goods which carry a one-year repair warranty. If minor repairs were to be
required for all goods sold in 20X7, the cost would be 100,000. If major repairs
were to be needed for all goods sold in 20X7, the cost would be 500,000. X plc
estimates that 80% of goods sold in 20X7 will have no defects, 15% will have minor
defects and 5% will have major defects.

Workshop 4 Sem 2 [week 6] Liabilities and Financial Instruments: Questions

Financial Instruments QUESTION: Janowitz

Question 2
a) Prepare concise definitions for equity and liabilities, including guidance on when
such components should be recognised in financial statements. Use your answer to
explain why the substance over form concept may require certain types of equity to
be reported as liabilities under IAS 32.
b) On 1st January 2015, Janowitz plc issued a debt instrument with a par value of 1m,
and spanning a term of five years (after which it is repayable at par). It received
790,000 on 1st January 2015, being the nominal value of the debt less a discount.
Interest is payable yearly in arrears at a yearly rate of 6.6%; and you have been told
that the implicit interest rate of the debt instrument is 12.5%.
Required:
Show how the above transaction should be accounted for in the financial accounts
for the year ended 31st December 2015.