(a) Provisions are par ticular kinds of liabilities. It therefore follows that provisions should be recognised 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 carr y 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 preser vation of the environment in its business activities.

Required:

Discuss whether the provision has been accounted for correctly under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.