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IAS 37Case studies (Step 3 of 5)

Case study

Step 3 of 5
Professional fileIAS 37L4 · Expert

Professional file: review of the provisions and contingencies of an industrial group

18 documents15 tasks≈ 240 min
0 / 30 items completed
Standards
IAS 37 — Provisions, Contingent Liabilities and Contingent Assets
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

The Halvoria group (fictitious entities) designs and manufactures agricultural and industrial equipment: irrigation pumps (Merquin), mechanical parts (Lunvalle Mécanique), a foundry (Vellmont), logistics (Rocbrune) and a distribution subsidiary in Spain (Junquera). You are the preparer of the group's provisions and contingencies review file at 31 December 20X5; the group financial controller is the reviewer. The financial statements will be authorised on 3 March 20X6. The ordinary movements of the year (utilisations) have already been recognised; the closing adjustments remain to be prepared.

Your assignment

Using the documents, classify each situation, measure the provisions (best estimate, discounting, reimbursements), deal with the onerous contract and the restructurings, prepare the movement schedule by class, record the closing entries, measure their impact, prepare the note on provisions and contingencies and answer the chief financial officer's proposals. Document the workpapers, the information requests and the conclusion of the file.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Events

Chronology of the file

  1. September 12 20X5Date of the order · Dated fact of the file

    Document 7

  2. October 8 20X5Date of the closure decision · Dated fact of the file

    Document 12

  3. November 4 20X5Date the competition inquiry was opened · Dated fact of the file

    Document 15

  4. November 20 20X5Date of the announcement to those affected · Dated fact of the file

    Document 12

  5. December 15 20X5Date of signature of the agreement · Dated fact of the file

    Document 14

  6. December 18 20X5Date of the decision to look for a buyer · Dated fact of the file

    Document 13

  7. December 31 20X5Reporting date · Dated fact of the file

    Document 1

  8. January 25 20X6Date of the court-appointed expert's report · Date of receipt · Dated fact of the file

    Document 5 · Document 14

  9. January 30 20X6Date of the insurer's letter · Dated fact of the file

    Document 6

  10. February 10 20X6Date of the letter of intent · Dated fact of the file

    Document 13

  11. February 12 20X6Date of the memo · Dated fact of the file

    Document 16

  12. March 3 20X6Date of authorisation of the financial statements · Dated fact of the file

    Document 1

  13. March 31 20X6Planned closure date · Dated fact of the file

    Document 12

  14. December 31 20X6Payment date of the works · Dated fact of the file

    Document 7

  15. December 31 20X8Remediation deadline · Dated fact of the file

    Document 9

Documents

File documents

18 documents: open each one to read it.

Document 1Memo

Review planning memo

Review planning memo. Reporting date: 31 December 20X5; financial statements to be authorised on 3 March 20X6. Situations to be examined: warranties on the new Merquin range, the Corvella Agri dispute and the insurer's reimbursement, clean-up of the former shared Quessandre depot, re-estimate of the Vellmont soil remediation, employment disputes, Lunvalle's Oberlin contract, closure of the Rocbrune logistics centre, proposed sale of Junquera, Arcantis settlement, claim against Talvorne Fonderies, competition inquiry at Rocbrune. Tax is not dealt with.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Reporting dateDecember 31 20X5
Date of authorisation of the financial statementsMarch 3 20X6
Probability that no repair is needed65%
Total cost of minor defects€240,000.00
Probability of minor defects30%
Total cost of major defects€1,300,000.00
Probability of major defects5%
Warranties: opening balance€410,000.00
Warranties: utilisations€230,000.00
Litigation: opening balance€260,000.00
Litigation: utilisation€60,000.00
Environment: opening balance€1,600,000.00
Warranties: balance after proposed entries€317,000.00
Litigation: balance after proposed entries€650,000.00
Environment: balance after proposed entries€2,550,000.00
Restructuring: balance after proposed entries€745,000.00
Onerous contracts: balance after proposed entries€50,000.00
Remaining best estimate of earlier warranties€180,000.00
Remaining best estimate of employment disputes€150,000.00
Amount claimed by Corvella Agri€900,000.00
Date of the court-appointed expert's reportJanuary 25 20X6
Settlement outcome€420,000.00
Probability of settlement60%
Partial award€700,000.00
Probability of a partial award30%
Probability of an award of the full claim10%
Amount recommended by the lawyers€500,000.00
Reimbursement accepted by the insurer€300,000.00
Date of the insurer's letterJanuary 30 20X6
Date of the orderSeptember 12 20X5
Total cost of the Quessandre clean-up€1,200,000.00
Halvoria's allocation key40%
Saulnière Chimie's allocation key35%
Fenwyck Logistics' allocation key25%
Share for which an outflow is probable for Halvoria65%
Payment date of the worksDecember 31 20X6
Pre-tax rate (Quessandre)4%
Pre-tax rate (Vellmont)5%
Expected expenditure estimated at 31 December 20X4€1,944,810.00
Revised expected expenditure at 31 December 20X5€2,083,725.00
Remediation deadlineDecember 31 20X8
Gearboxes to be delivered400 units
Fixed unit price€2,500.00
Contract price (economic benefits expected)€1,000,000.00
Direct materials€620,000.00
Direct labour€330,000.00
20X6 depreciation of the machining centre€400,000.00
Share of machine hours for Oberlin20%
20X6 depreciation of the test bench after impairment€20,000.00
Carrying amount of the test bench€95,000.00
Recoverable amount of the test bench (IAS 36)€20,000.00
Share of head-office costs€35,000.00
Date of the closure decisionOctober 8 20X5
Date of the announcement to those affectedNovember 20 20X5
Planned closure dateMarch 31 20X6
Redundancy payments€640,000.00
Penalty for terminating the transport subcontract€60,000.00
Dismantling of racking€45,000.00
Training of retained staff€55,000.00
New warehouse management software€180,000.00
Customer information campaign€25,000.00
Operating losses until closure€90,000.00
Expected gain on the sale of the forklift trucks€30,000.00
Date of the decision to look for a buyerDecember 18 20X5
Date of the letter of intentFebruary 10 20X6
Estimated costs of sale€120,000.00
Date of signature of the agreementDecember 15 20X5
Indemnity payable by Arcantis€210,000.00
Date of receiptJanuary 25 20X6
Amount claimed from Talvorne Fonderies€380,000.00
Estimated amount of the expected inflow€340,000.00
Date the competition inquiry was openedNovember 4 20X5
Date of the memoFebruary 12 20X6
Report budget€85,000.00
Amount of the credit line€15,000,000.00
Credit margin1.4%

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort18

  • Review planning memo

  • Merquin after-sales statistics

  • Provisions trial balance at 31 December 20X5

  • Memo from the employment law and quality departments

  • Lawyers' letter on the Corvella Agri dispute

  • Product liability insurer's letter

  • Court order and agreement between former occupiers (Quessandre)

  • Group treasury memo

  • Engineering report on the Vellmont foundry

  • Lunvalle Mécanique and Oberlin Tracteurs contract

  • Oberlin contract budget and impairment test

  • Rocbrune minutes

  • Board minutes on Junquera

  • Settlement agreement with Arcantis Machines

  • Lawyers' letter on the other cases

  • Chief financial officer's proposals

  • Corporate social responsibility report budget

  • Bank financing offer

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Analyse the file: which situations should be examined, which documents are useful and what information is missing?

      2. Task 2Professional judgement

        Classify each situation: provision, contingent liability, contingent asset or recognised asset.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Classify each situation: provision, contingent liability, contingent asset or recognised asset.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Calculation

        Calculate the expected value of the Merquin warranties and of the outcomes of the Corvella dispute.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the expected value of the Merquin warranties and of the outcomes of the Corvella dispute.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Most likely outcome of the Corvella dispute

      4. Task 4Professional judgement

        Determine the best estimate of the Corvella dispute and the treatment of the insurer's reimbursement.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Determine the best estimate of the Corvella dispute and the treatment of the insurer's reimbursement.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Reimbursement asset (insurer)

      5. Task 5Calculation

        Calculate the provisioned share and the contingent liability share of the Quessandre obligation.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the provisioned share and the contingent liability share of the Quessandre obligation.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Quessandre share treated as a contingent liability

      6. Task 6Calculation

        Discount the Quessandre provision and re-estimate the Vellmont remediation.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Discount the Quessandre provision and re-estimate the Vellmont remediation.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Revised present value of the Vellmont remediation

      7. Task 7Calculation

        Impair the test bench and calculate the provision for the Oberlin contract.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Impair the test bench and calculate the provision for the Oberlin contract.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €

        Checks

        • 0 / 6 steps entered
        • Amounts readable

        Result: Onerous contract provision

      8. Task 8Professional judgement

        Is there an obligation to restructure at 31 December 20X5 for Rocbrune and for Junquera?

      9. Task 9Calculation

        Calculate the provision for the closure of Rocbrune.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the provision for the closure of Rocbrune.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Costs excluded from the Rocbrune provision

      10. Task 10Calculation

        Prepare the movement schedule by class and reconcile it with the general ledger.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Prepare the movement schedule by class and reconcile it with the general ledger.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €
        8. €
        9. €
        10. €
        11. €
        12. €
        13. €
        14. €

        Checks

        • 0 / 14 steps entered
        • Amounts readable

        Result: Total provisions at the reporting date

      11. Task 11Journal entries

        Record the closing entries.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 3 · Journal entry · Journal entries

        Entry 3 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 4 · Journal entry · Journal entries

        Entry 4 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 5 · Journal entry · Journal entries

        Entry 5 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 6 · Journal entry · Journal entries

        Entry 6 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 7 · Journal entry · Journal entries

        Entry 7 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 8 · Journal entry · Journal entries

        Entry 8 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 9 · Journal entry · Journal entries

        Entry 9 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 10 · Journal entry · Journal entries

        Entry 10 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 11 · Journal entry · Journal entries

        Entry 11 of 11

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      12. Task 12Effects on the financial statements

        What is the impact of the closing entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      13. Task 13Analysis

        Prepare the content of the note on provisions and contingencies.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Prepare the content of the note on provisions and contingencies.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      14. Task 14Professional judgement

        Determine the extent of the disclosures on contingencies and answer the chief financial officer.

      15. Task 15Conclusion

        Write the conclusion of the file.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedBlocking note: share of Fenwyck, in liquidation, ignored; Quessandre provision to be recalculated and discounted.
      • BlockingResolvedBlocking note: litigation movement schedule not reconciled; Corvella reimbursement offset against the provision.
      • BlockingResolvedBlocking note: Rocbrune provision including excluded costs and net of a disposal gain.
      • Non-blockingOpenNon-blocking note: have the revised Vellmont estimate confirmed by an external expert at the next reporting date.

      Information requests

      • ObtainedRequest to the insurer: written confirmation of the reimbursement for the Corvella dispute.
      • Assumption documentedRequest to Saulnière Chimie: latest financial statements; judgement documented without them.

      Completion checklist

      • Workpapers completed and reconciled with the documents.Done
      • Entries balanced and reconciled with the workpapers.Done
      • Note reconciled with the movement schedule and the contingencies.Done
      • Reviewer's blocking notes resolved.Done
      • Normative references.To review
      • Expected reimbursement for the Quessandre clean-up: not applicable.Not applicable

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 30).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 37 §14
      • IAS 37 §15
      • IAS 37 §16
      • IAS 37 §17
      • IAS 37 §19
      • IAS 37 §23
      • IAS 37 §24
      • IAS 37 §25
      • IAS 37 §27
      • IAS 37 §28
      • IAS 37 §29
      • IAS 37 §30
      • IAS 37 §31
      • IAS 37 §33
      • IAS 37 §34
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37 §39
      • IAS 37
      • IAS 37 §42
      • IAS 37 §43
      • IAS 37 §45
      • IAS 37
      • IAS 37 §47
      • IAS 37 §53
      • IAS 37 §54
      • IAS 37 §56
      • IAS 37 §58
      • IAS 37 §59
      • IAS 37 §60
      • IAS 37 §61
      • IAS 37 §62
      • IAS 37 §66
      • IAS 37 §67
      • IAS 37 §68
      • IAS 37 §68A
      • IAS 37 §69
      • IAS 37 §70
      • IAS 37
      • IAS 37 §73
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37 §80
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37 §84
      • IAS 37 §85
      • IAS 37 §86
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37
      • IAS 37 §91