(a) In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, define a provision and explain briefly when a provision should be recognized in financial statements.

(b) JEANS AND JUMPERS plc is a well-known, high street retail outlet with branches all over Ireland. The year end of the company is 31 December 1999. The following information is available:

(i) As part of its customer service, the company has a policy of refunding purchases to dissatisfied customers, even though there is no legal obligation to do so. In the past, approximately 10% of goods sold were returned and refunds given. (ii) During November 1999, a decision was taken in principle to close the company’s Cork branch. However, no formalized plan in connection with the closure had been devised, the decision had not been communicated to the employees of the company at the date of the statement of financial position and no other steps had been taken to implement this decision at that date.

(iii) The company is famous for its in-store ‘tea rooms’, where tired shoppers can °

avail of light refreshments. During the year ended 31 December 1999, 200 people became ill after eating the JEANS AND JUMPERS plc ‘special super deluxe gateau’. Ten of these people died. Legal proceedings have been started against the company for compensation. However, the company denies liability, stating that, at the time of the food poisoning outbreak, the local council was working on the water mains fixing burst pipes and it firmly believes that the water became contaminated during the repair process. The company’s lawyers indicated, up to the date of approval of the financial statements, that the company would probably be found not liable.

(iv) The company had a lease on an old warehouse in Galway. As part of a centralization programmed, all merchandise is now being*stored in Dublin warehouses.

JEANS AND JUMPERS plc has tried to cancel the Galway lease which still has 3 years to run. However, due to the terms of the lease contract, it has-been unable to do so.

Requirement In respect of the financial statements of JEANS AND JUMPERS plc for the year ended 31 December 1999, outline each of the following in accordance with LAS 37 Provisions, Contingent Liabilities and Contingent Assets:

(a) The accounting treatment for each of the above items; and

(b) Where appropriate, the disclosure requirements for each of the items.

(Assume materiality exists in all cases.)