Future events and expected disposals

Learning objectives

• Determine whether a future event (technological change, new legislation) may be reflected in the measurement, in the light of sufficient objective evidence.L2, L3
• Identify the prohibition on deducting gains from the expected disposal of assets from the provision.L2

Normative references

• IAS 37 §48Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision where there is sufficient objective evidence that they will occur.
• IAS 37 §49Expected future events may be particularly important, for example for the costs of cleaning up a site at the end of its life: the amount reflects the reasonable expectations of technically qualified, objective observers about the technology that will be available at the time of the clean-up. Expected cost reductions associated with increased experience in applying existing technology, or the expected cost of applying existing technology to a larger or more complex operation, may be included; an entirely new technology is anticipated only if it is supported by sufficient objective evidence.
• IAS 37 §50The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted; evidence is needed both of what the legislation will demand and of whether it is virtually certain to be enacted and implemented.
• IAS 37 §51Gains from the expected disposal of assets are not taken into account in measuring a provision.
• IAS 37 §52Such gains are excluded even if the expected disposal is closely linked to the event giving rise to the provision; they are recognised at the time specified by the standard dealing with the assets concerned.

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

9 questions

• The gain expected on the sale of land, linked to the closure of a site, is deducted from the provision for closure costs.L2
• Under what condition is a future event that may change the cost of settling an obligation reflected in the provision?L2
• Jalvane will have to clean up a site in eight years. The cost, using proven techniques, is estimated at 2,000,000. A laboratory is testing an entirely new biological process that could halve this cost; no industrial-scale trial has yet succeeded. What cost should be used?L3
• Each year, Kervane decommissions several similar installations using an existing technique. Independent technical studies, based on its recent projects, show that the experience gained will reduce by 10% the cost of the decommissioning planned in five years. Can it take this into account?L3
• Lumenord is measuring an existing restoration obligation. Possible new legislation would tighten restoration standards. When does it take this into account in the measurement?L2
• To include in its clean-up provision the effect of a stricter future law, what evidence must Moravel have?L3
• Norvessa must clean up, for 650,000, an industrial site it is going to close; it then expects to sell the land at a gain of 400,000. The sale is closely linked to the closure. What amount should be provided for?L2
• A gain expected on the disposal of assets is excluded from the provision even if the disposal is closely linked to the event giving rise to it; the gain is recognised at the time specified by the standard dealing with the assets concerned.L2
• Ombrée has an obligation to restore a landfill in ten years. A draft regulation, still under consultation and whose content changes from one version to the next, could require a thicker cover and increase the cost by 30%. What is the effect on the provision at the reporting date?L3