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IAS 37Workpapers (Step 4 of 5)

Workpaper assignment

Step 4 of 5
Mission · workpaperWorkpaper · IAS 37L3 · Advanced

Documents

Narvelle Distribution supply contract

Contract

Narvelle Distribution supply contract

Contract signed on 1 March 20X2 with Narvelle Distribution (a fictitious entity), a customer of Pellivar. Pellivar must deliver in 20X3 the remaining 3,000,000 trays at the fixed price of 0.40 each, i.e. 1,200,000 to be invoiced. Pellivar can terminate the contract only by paying a lump-sum indemnity equal to 125% of the price still to be invoiced, i.e. 1,500,000, intended to cover the customer's replacement sourcing costs.

Onerous contract review: Ilbaro supply contract

Onerous supply contract: cost of fulfilling, exit penalty and prior impairment

5 documents8 sections to document
0 / 5 sections completed
Guided mode

Section 1 of 8

Objective

In progress
Section brief
What to document
The engagement, its scope and the working mode chosen.
Why
A workpaper answers one precise question: framing it avoids off-topic work.
How
Read the objective and the assignment, then choose the mode (guided, semi-guided, professional).
Expected result
You know which question the workpaper must settle, and for which reporting date.
Your role
Preparer of the IAS 37 workpaper
Level
Advanced
Estimated time
≈ 40 min
Progress
0 / 4 steps done (review excluded)

Context

Pellivar Emballages SA (a fictitious entity) manufactures thermoformed food trays. The surge in the price of resin at the end of 20X2 has eroded the profitability of several supply contracts. You are preparing the financial statements for the year ended 31 December 20X2.

Assignment

Onerous contract review workpaper (Narvelle, Ilbaro, resin order).

Purpose of the workpaper

Check that the contract creates obligations that cannot be cancelled without paying compensation, first recognise any impairment loss on the assets used in fulfilling the contract (IAS 36), then determine the cost of fulfilling it (incremental costs and an allocation of other directly related costs). The contract is onerous if that cost exceeds the economic benefits expected. The provision is the least net cost of exiting: the lower of the net cost of fulfilling (cost of fulfilling − expected benefits) and any compensation or penalties arising from failure to fulfil it (reading adopted in this course).

Questions of the file covered by this workpaper

  • Which contracts and commitments fall within IAS 37? Can the division's expected loss be provided for?
  • Calculate the cost of fulfilling the Narvelle and Ilbaro contracts.
  • Is the Narvelle contract onerous? Determine its net cost of fulfilling and its least net cost of exiting: is it better to fulfil it or to exit?
  • Calculate and recognise the impairment loss on the dedicated mould.
  • Calculate the onerous contract provision and the headroom of the Ilbaro contract.
  • Recognise the onerous contract provision.

Documents in the file

Open the documents to pick out the relevant information.

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View the workpaper template