God is Almighty
BAS 37_Math
Example: 1 Ref: ST-6, Chap-3, CR
The F Co. sells electrical goods covered by one year warranty for any defects.
Of sales of BDT 60 million for the year, the company estimates that 3% will have major defects, 6%
will have minor defects and 91% will have no defects.
The cost of repairs would be BDT. 5 million if all the products sold had major defects and BDT. 3
million if all had minor defects.
Requirement:
What amount should F provide as a warranty provision?
Solution:
Provision must be made for estimated future claims by customers for goods already sold.
The expected value = (5 million x 3%) + (3 Million x 6%) is the best estimate of this amount.
Example: 1 Ref: ST-9, Chap-3
The Noble Company operates a fleet of commercial aircraft. On 1 April 2007, a new law was
introduced requiring all operators to use aircraft fitted with fuel-efficient engines only.
At 31 December 2007, Noble had not fitted any fuel-efficient engines and the total cost of fitting them
throughout the fleet was estimated at BDT 4.2 million.
Under the terms of the legislation, the company is liable for a fine of BDT 1 million for non-
compliance with legislation for any calendar year, or part of a year, in which the law has been broken.
The government rigorously prosecutes all violations of the new law.
The effect of the time value of money is immaterial.
Requirement:
State the provision required in Noble’s financial statements for the year ended 31 December 2007
under BAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Solution:
No provision is required for the fitting of the engines. This is because the present obligation as a result
of past event required by BAS 37.14 does not exist. The company can choose not to fit the engines
and then not to operate the aircraft.
A provision of BDT 1.0 million is, however required in relation to the fines, because at the reporting
date there is a present obligation in respect of a past event (the non-compliance with legislation).
Example: 2 Ref: ST-10, Chap-3
The Noname Co. decided to carry out a fundamental restricting of its papermaking division which
operates in Hyberia. The effect was that most activities carried out in this location would cease with a
number of employees being made redundant, whereas other activities and employees would relocate
to Sidonia where there was unused capacity. Negotiations with landlords and employee
representatives were concluded on 30 December 2007 and a formal announcement was made to all
employees on 31 December 2007.
The restructuring budget approved by the board of directors in November 2007 included the following
amounts:
Payment to employees: BDT
Termination payments to those taking voluntary redundancy 90,000
Termination payment to those being made compulsory redundant 180,000
One-off payments to employees agreeing to move to Sidonia 37,000
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Employment cost for closing down activities in Hyberia in preparation for the
move to Sidonia 50,000
Lease costs:
5 year remaining of the lease which can immediately be sublet for BDT. 70,000 45,000 p.a
per annum
7 years remaining of the lease which can immediately be sublet for BDT 35,000 90,000p.a
per annum
Cost of moving plant and equipment from Hyberia to Sidonia 26,000
Impairment losses on non-current assets under BAS 36 Impairment of Assets 110,000
Trading transactions in Hyberia up to date of closure, other than those itemized above:
Revenue 850,000
Expenses 1,150,000
None of these amounts has yet been recognized in Noname’s Financial Statements. The effect of the
time value of money is immaterial.
Requirement:
Determine the amounts to be included in the financial statements for the Noname Company for the
year ending 31 December 2007 according to BAS 37 Provisions, Contingent Liabilities and
Contingent Assets.
Solution:
The total amount recognized in profit and loss in the BDT 385,000 lease provision for the onerous
lease + BDT 270,000 restructuring provision + BDT 110,000 impairment losses = BDT 765,000
The five year lease is not an onerous contract in terms of BAS 37.10 because the premises can be
sublet at profit. The seven year lease is an onerous contract and under BAS 37.66 the provision should
be measured at = (90,000 – 35,000) x 7 years = BDT 385,000.
Under BAS 37.80 all payments to employees should be included in the restructuring provision, with
the exception of the employment costs of BDT 50,000 in preparation for the move to Sidonia and
BDT 37,000 payable to those moving to Sidonia –this relates to the ongoing activities of the business,
so is disallowed by BAS 37.80 (b). For the same reason the costs of moving plant and equipment is
disallowed. Impairment losses reduce the carrying amount of the relevant assets rather than increasing
the restructuring provision and revenue less expenses are trading losses which are disallowed by BAS
37.63. So, provision, excluding the onerous lease is BDT 90,000 + BDT. 180,000= BDT 270,000.
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