What is important in these scenarios is to find answers to the following questions:

Is there a present obligation as a result of a past obligating event?

Is a transfer of economic benefits probable during the settlement of the obligation?

Can a reliable estimate be made of the amount of the obligation?

If the answer to all questions is "yes", then a provision should be recognised in the

financial statements under IAS $37.$

a$)$ A sale of a division

In November $2013,$ the company decided to sell off one of its operations. No buyer has

been found at $31$ December $2013,$ but the sale is expected to result in a loss of

$$500,000$ when it occurs. The company wishes to provide for this loss in the financial

statements for the year to $31$ December $2013.$

b$)$ Contaminated land $1$

An entity in the oil industry causes contamination but cleans up only when required to do

so under the laws of the particular country in which it operates. One country in which it

operates has had no legislation requiring clean up$,$ and the entity has been contaminating

land in that country for several years. At the year end, it is virtually certain that a draft law

requiring clean$-$up of land already contaminated will be enacted shortly.

g$)$ Contaminated land $2$

An entity in the oil industry causes contamination in a country where there is no

environmental legislation. However, the entity has a widely published environmental

policy in which it undertakes to clean up all contamination that it causes. The entity has a

record of honouring this published policy and this cost of rectifying the damage caused to

date is $$5m.$

Constructive obligation, rather than a legal obligation

Create the provision$/$CL for the best estimate of the clean up costs