Reference no: EM133165704

Question -

Q1. i) Discuss the characteristics of a provision.

ii). Define a constructive obligation.

iii). Explain at what point would a contingent liability become a provision.

iv). Explain how a borrowing cost could arise as part of the measurement of a provision. Illustrate your explanation with a simple example.

Q2. The government introduces a number of changes to the Value added tax system. As a result of these changes, Company A, a manufacturing company, will need to retain a large proportion of its administrative and sales workforce in order to ensure continued compliance with the new taxation regulations. At the end of the reporting period, no retraining of staff has taken place. Should Company A provide for the costs of staff training at the end of the reporting period?

Q3. Company B, a listed company, provides food to function centres that host events such as weddings and engagement parties. After an engagement party held by one of Company B's customers in June 2021, 100 people become seriously ill, possibly as a result of food poisoning from products sold by Company B. Legal proceedings were commenced seeking damages from Company B, which disputed liability by claiming that the function centre was at fault for handling the food incorrectly. Up to the date of authorization for the financial statements' issue for the year to 30 June 2021, Company Lawyers advised that it was probable that company B would not be found liable. However, two weeks after the financial statements were published, Company B's lawyer's advice that, owing to developments in the case, it was probable that Company B would be found liable and the estimated damages would be material to the company's reported profits.

Required - Should company B recognize a liability for damages in its financial statements at 30 June 2021? How should it deal with the information it receives two weeks after the financial statements are published?