Question
Gromit plc operates a fleet of commercial aircraft. On 21 February 20X1 the government passed a new law requiring the mandatory upgrade of the electronic
Gromit plc operates a fleet of commercial aircraft. On 21 February 20X1 the government passed a new law requiring the mandatory upgrade of the electronic security systems on board all commercial aircraft. The deadline to complete the upgrade works was 31 September 20X1 and failure to meet the deadline would be punishable with a penalty of 1 million. Gromit plc drafted an upgrade plan and estimated total upgrade costs to be 2 million, however by 31 December 20X1 (Gromit plcs financial year end) the company had not yet committed to the plan, and none of the upgrade work had started. The government started legal proceedings against Gromit plc in November 20X1 for non- compliance with the law. In December 20X1, Gromit plcs lawyers provided an opinion suggesting that it was more likely than not that Gromit plc would be found liable to pay the 1 million statutory penalty, and that the final judgment on the court case would probably be provided in late 20X2. Gromit plcs accountants recognised a provision of 3 million (2 million related to the cost of the upgrade works and 1 million related to the penalty) in Gromit plcs statement of financial position at 31 December 20X1.
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Explain how the events described above should be accounted in Gromit plcs financial statements for the year ending 31 December 20X1 according to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, describing the relevant IFRS rules and specifying whether you agree with the amounts recognised by Gromit plcs accountants.
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Explain the meaning of cookie jar accounting and briefly discuss whether the events described above could provide Gromit plc with an opportunity to engage in this form of earnings manipulation.
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