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PROVISIONS, CONTINGENT LIABILITIES & CONTINGET ASSETS – IPSAS 19

QUESTION 1
IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets is an important standard regulating the
recognition of liabilities and the use of provisions. It has been especially useful in controlling the abuse of
provisions to manage reported earnings.
REQUIREMENT:
(a) Define a provision and discuss in detail the three conditions that must be satisfied in order for a
provision to be recognised under IPSAS 19. Your answer should explain how the requirements of
IPSAS 19 are consistent with the principles contained in the conceptual framework. (10marks)
(b) Discuss briefly how each of the following transactions and events should be recorded by SIDO (Small
Industries Development Organization) in compliance with the requirements of IPSAS 19.
(i) A decision was taken by the board of SIDO shortly before the year-end to close down a
division. The costs of the closure are estimated to total 30 million. The decision was
announced in principle, but detailed implementation plans have not been made yet.
(2 marks)
(ii) SIDO has traditionally repainted its premises every five years. The next painting is due in
a year’s time. The entity proposes to accrue as a provision the expected cost of repainting
the premises. (2 marks)
(iii) SIDO has sold 5,000 units of a product to customers during the past 12 months with a
year’s warranty attaching. Past experience has shown that 3% of goods sold require
warranty repair at an average cost of TZS.200 per unit. (4 marks)
(iv) SIDO has guaranteed the debts of its associate company up to a maximum amountof
TZS.3 million. The associate is in excellent financial health and the directors are of the
opinion that it is unlikely the guarantee will ever be called in. (2 marks)
[Total: 20 MARKS]
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QUESTION 2
IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets sets out the accounting treatment and
disclosures for these transactions and events. The standard discusses general principles of recognition,
measurement and presentation as well as specific application guidance for certain issues. This guidance
aims to assist preparers of public sector financial statements in applying IPSAS 19.
The following situations have arisen during the preparation of the draft financial statements of TANESCO
(Tanzania Electric Supply Company) for year ended 31 July 2017:
(i) On 1 August 2016, TANESCO acquired a nuclear power plant at a cost of 200 million. Part of
the arrangement was that the plant be dismantled and the site restored after its useful
economic life of 20 years had passed. The cost of restoration was estimated on 1 August
2016, after discounting to present value, to be 40 million. This amount reflected an appropriate
discount rate of 6%, (75% of this estimate related to the dismantling of the plant, and 25% to
the removal of waste fuel). At 31 July 2017, due to regulatory and other obstacles, no power
had yet been produced, hence no waste fuel had been generated.
(ii) During the year ended 31 July 2017, TANESCO decided to close both its coal burning power
generating plants in October 2017. This decision has been announced publicly, and a detailed
formal plan prepared. The plan proposes to make 75 employees redundant, retrain 25 other
staff to work in the nuclear plant, and sell the coal-fired plants in their current condition. It is
anticipated that the redundancy costs will amount to 7.5 million, and the retraining will cost
1 million. The coal plants will be disposed of for zero consideration as the new owner will be
expected to dismantle the plants and clean up the sites. The carrying value of these plants is
12 million at 31 July 2017.
REQUIREMENT:
(a) Discuss the accounting treatment in relation to provisions, contingent liabilities and contingent
assets required by IPSAS 19. (8 marks)
(b) In the case of (i) and (ii) above, set out the appropriate accounting treatment as at 31 July 2017,
applying IPSAS 19 and other relevant standards. (12 marks)
[Total: 20 Marks]
QUESTION 3
URAFIKI TEXTILE MILLS is a government owned clothing manufacturer, Mr Michael who is in charge of sales
department has asked you for advice in relation to IPSAS 19 Provisions, Contingent Liabilities and
Contingent Assets.
REQUIREMENT:
Michael has asked you to prepare a report which addresses the following:
(a) Explain the recognition criteria for recognising a Provision in accordance with IPSAS 19,
Provisions: Contingent Liabilities and Contingent Assets. (3 Marks)
(b) In relation to obligations, define
(i) A Legal Obligation; and
(ii) A Constructive Obligation. (4 Marks)
c) Explain how a Provision is measured. (3 Marks)
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d) Michael has a policy of refunding purchases to dissatisfied customers even though he is under no
legal obligation to do so. His policy of issuing refunds is generally well known, as he always
reinforces the point in any advertising he does and normally 4% of goods are returned.
REQUIREMENT:
Explain, in relation to this refund policy, whether a recognition of a provision is necessary.
(5 Marks)
e) Michael sells washing machines under a warranty whereby the costs of repairs for any
manufacturing defects discovered within six months of sale are covered. If minor defects are
detected in all washing machines sold, then repair costs of TZS.200,000 would be incurred. If there
are major defects detected in all washing machines sold, then repair costs of TZS.500,000 would be
incurred. His experience and future expectations indicate that in the next six months, 85% of
washing machines will have no defects, 10% will have minor defects and 5% will have major
defects.
REQUIREMENT:
Discuss whether a provision should be recognised in relation to washing machines and calculate
the amount, if any, of the provision. (5 Marks)
[Total: 20 Marks]

QUESTION 4
IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets sets out the principles for accounting for
provisions and contingences.
REQUIREMENTS:
(a) Explain the objectives of IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets
concerning the recognition of provisions and outline the recognition criteria. (5 Marks)
(b) State the circumstances in which a company would recognise a contingent liability. (2 Marks)
(c) CARMATEC (Centre for Agricultural Mechanization and Rural Technology), a government owned
company is a manufacturer of moulding products, prepares its financial statements to 31 December
2008. The Board of Directors are finalising the financial statements and need assistance on the
treatment of the following issues:
(i) The company manufactures and sells Product X with a one year repair warranty. It is
estimated that 70% of the goods sold in 2008 will have no defects, 22% will haveminor
defects and 8% will have major defects. It is estimated that it would cost thecompany
TZS.150,000 if all the goods sold had minor defects. This figure would rise to a TZS.1m if all
the goods had major defects. The warranty provision at 1 January 2008 was TZS.102,000
with a claim of TZS.96,000 settled during the year. (4 marks)
(ii) Smith PLC purchased and used a batch of Product Y in its production in August 2008,
which Smith PLC is claiming caused major damage to its production equipment.
CAMARTEC PLC is being sued for damages. Lawyers have advised that there is a 40%
change of successfully defending the claim. If the claim is successful, damages are
estimated at TZS.2m with a present value of TZS.1.8m. The investigative team of accident
consultants have concluded that part of the reason for the defective product produced by
CAMARTEC was the supply of faulty parts bya supply company, Glen Ltd. The legal team
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estimate Glen Ltd’s contributory negligence amounts to 10% of the damages and they
believe a claim against Glen Ltd is likely to succeed. (4 marks)
(iii) The Directors decided in October 2008 to restructure the production division to reduce
costs and improve efficiencies. This plan was initiated in November 2008 with full staff
consultation.
At 31 December 2008 the anticipated costs are:
TZS.
Redundancy costs 400,000
Lease cancellations 75,000
Retraining 60,000
Investment in new systems 25,000
Prepare a memorandum to the Board of Directors of CAMARTEC PLC stating how the
above issues should be reflected in the company’s published financial statements for the
year ended 31 December 2008.
Assume all items are material and ignore taxation. (4 Marks)
Memo, Layout & Structure (1 Mark)
[TOTAL: 20 MARKS]