1. IAS 37 Provisions, Contingent Liabilities and Contingent Assets was issued in 1998. The Standard sets out the principles of accounting for these items and clarifies when provisions should and should not be made. Prior to its issue, the inappropriate use of provisions had been an area where companies had been accused of manipulating the financial statements and of creative accounting.

Required:

(a). Describe the nature of provisions and the accounting requirements for them as contained in IAS 37.

(b). Explain why there is a need for an accounting standard in this area. Illustrate your answer with three practical examples of how the standard addresses controversial issues.

2. On 1 January 2020, Tullow plc acquired a newly constructed oil platform at a cost of 30 million together with the right to extract oil from an offshore oilfield under a government licence. The terms of the licence are that Tullow plc will have to remove the platform (which will then have no value) and restore the seabed to an environmentally satisfactory condition in 10 years time when the oil reserves have been exhausted. The estimated cost of this on 31 December 2030 will be 15 million. The present value of 1 receivable in 10 years at the appropriate discount rate for Tullow plc of 8% is 046.

Required:

(i) Explain and quantify how the oil platform should be treated in the financial statements for the year ended 31 December 2020.

(ii) Describe how your answer to (i) would change if the government licence did not require an environmental clean-up.

3. Plant Pool plc has recently purchased an item of earth moving plant at a total cost of 24 million. The plant has an estimated life of 10 years with no residual value. However, its engine will need replacing after every 5,000 hours of use at an estimated cost of 7.5 million. The directors of Plant Pool intend to depreciate the plant at 2.4 million (24 million/10 years) per annum and make a provision of 1,500 (7.5 million/5,000 hours) per hour of use for the replacement of the engine.

Required:

Explain how the plant should be treated in accordance with International Accounting Standards 37 and comment on the Directors proposed treatment.

4. BE130 plc sells a line of goods under a six-month warranty. Any defect arising during that period is repaired free of charge. BE130 has calculated that if all the goods sold in the last six months of the year required repairs the cost would be 2 million. If all of these goods had more serious faults and had to be replaced the cost would be 6 million.

The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have to be replaced.

Required:

Compute the amount of the provision that BE130 should set aside and the accounting treatment required both in the Income Statement and Statement of Financial Position.

(Show working out)