Future operating losses

Learning objectives

• Identify the prohibition on providing for future operating losses and its basis (neither a liability nor the criteria in para. 14).L1, L2
• Explain that an expectation of future operating losses is an indication of impairment to be tested under IAS 36.L2

Normative references

• IAS 37 §63Provisions are not recognised for future operating losses.
• IAS 37 §64Future operating losses do not meet the definition of a liability (para. 10) or the general recognition criteria for provisions (para. 14).
• IAS 37 §65An expectation of future operating losses is an indication that certain assets of the operation may be impaired; the entity tests those assets for impairment under IAS 36.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

8 questions

• No provision is recognised for future operating losses.L1
• The retail chain Halvorine forecasts, for its network of town-centre shops, an operating loss of 1,200,000 in 20X6. What does it recognise at 31 December 20X5 for this loss?L1
• Why can future operating losses not be provided for?L2
• An expectation of future operating losses indicates that certain assets of the business may be impaired; the entity then tests them for impairment under IAS 36.L2
• At 31 December 20X5, Idrane recognised a "provision for 20X6 operating losses" of 430,000 for its vehicle hire subsidiary, whose 20X6 budget shows a loss. What is the error?L2
• Jomarel expects operating losses at its profiles plant for the next three years. What must it do at the reporting date?L2
• For its printing division, whose losses are expected to continue, Kesmar set up a provision for future losses of 800,000 and performed no impairment test, considering the risk "already covered". Which analysis is correct?L2
• A future operating loss meets the definition of a liability as soon as it is included in a budget approved by the board of directors.L2