After the Reporting Period

After the Reporting Period



After the Reporting Period

Provisions, Contingencies and Events after the Reporting Period

1.       Definitions – HKAS 37




(1)        A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
(2)        Provisions are liabilities of uncertain timing or amount.
(3)        An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. This may be due to:
(i)         legal obligations; or
(ii)        constructive obligations
(4)        A legal obligation is an obligation that derives from:
(i)         a contract;
(ii)        legislation; or
(iii)       other operation of law.
(5)        A constructive obligation is an obligation that derives from an entity’s actions where:
(i)         by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
(ii)        as a result the entity has create a valid expectation on the part of those other parties that it will discharge those responsibilities.
(6)        A contingent liability is:
(i)         a possible obligation that arise from past events and whose existence will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events that are not wholly within the control of the entity; or
(ii)        a present obligation that arises from past events but is not recognized because:
(a)        it is not probable that an outflow of benefits embodying economic benefits will be required to settle the obligation; or
(b)        the amount of the obligation cannot be measured with sufficient reliability.
(7)        A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

1.2       The accounting/disclosure requirements are summarized in the following table:

Degree of probability of an outflow/inflow of resources








Disclose by note


Disclose by note

No disclosure


No disclosure

No disclosure

2.       Recognition


Recognition criteria


A provision should be recognized when:
(1)        an enterprise has a present obligation (legal or constructive) as a result of a past event (企業因過去事項而承擔項現時的法定或推定義務);
(2)        it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation (結算該義務很可能要求含經濟利益的資源流出企業); and

(3)       a reliable estimate can be made of the amount of the obligation (該義務的金額可以可靠地估計).

2.2       A present obligation exists when the entity has no realistic alternative but to make the transfer of economic benefits because of a past event (the obligating event).
2.3       The mere intention or necessity to undertake expenditure related to the future is not sufficient to give rise to an obligation.
2.4       If the entity retains discretion to avoid making any expenditure, a liability does not exist and no provision is recognized:
(1)        the mere existence of environmental contamination (even if caused by the entity’s activities) does not in itself give rise to an obligation because the entity could choose not to clean it up;
(2)        a board decision alone is not sufficient for the recognition of a provision because the board could reverse the decision;
(3)        if a decision was made that commits an entity to future expenditure no provision need be recognized as long as the board have a realistic alternative.

3.       Measurement




(1)       The amount recognized as a provision should be the best estimate of the expenditure required to settle the obligation that existed at the reporting date.
(2)       The estimate should take into account:
(i)         risks and uncertainties associated with the cash flows
(ii)        expected future events (for example, new technology or new legislation)
(iii)       discounting whenever the effect of this is material.
(3)        If the effect of the time value of money is material, then the provision should be discounted. The discount rate should be pre-tax and risk specific. The tax consequences of the provision are dealt with in accordance with HKAS 12 “Accounting for Deferred Tax”.
(4)        The unwinding of the discount is a finance cost, and it should be disclosed separately on the face of the statement of comprehensive income/income statement.
(5)        Provisions should be reviewed at each reporting date and adjusted to reflect the current best estimate.

4.       Specific Circumstances

4.1       Future operating losses

4.1.1    Provisions are not recognized for future operating losses because:
(1)        they do not arise out of a past event, i.e. no present obligation; and
(2)        they are not unavoidable.
4.1.2    An expectation of future losses is an indication that the assets of the entity may be impaired. The assets should therefore be tested for impairment according to IAS 36.

4.2       Onerous contracts

4.2.1    If an entity has a contract that is onerous the present obligation under that contract is recognized as a provision.

4.3       Restructuring

4.3.1    Restructuring includes terminating a line of business, closure of business locations, changes in management structure, and refocusing a business’s operations.


Key points


(1)        Evidence of the commitment might be:
(i)         the public announcement of the detailed plan;
(ii)        the commencement of implementation (e.g., dismantling plant, selling assets, notifying external parties and communication to employees);
(iii)       other circumstances constructively obliging the entity to complete the reorganization.
(2)        The detailed plan should identify (as a minimum):
(i)         the business or part of a business concerned;
(ii)        the principal locations affected;
(iii)       the location, function and approximate number of employees whose services are to be terminated or duties changed;
(iv)       the expenditures that will be undertaken; and
(v)        the time at which the plan will be implemented. Implementation should begin as soon as possible and the period of time to complete implementation should be such that significant changes to the plan are likely.
(3)        A board decision on its own is not a demonstrable commitment, unless the membership of the Board contains representatives of interests other than management, as is the case in some countries. Announcement of plans to the public or to employees might constitute commitment, depending on the level of detail communication.

4.3.3    Provisions for reorganizations should include only those expenditures that are both:
(1)        necessarily entailed by a reorganization to which the entity is demonstrably committed; and
(2)        not associated with ongoing or new activities of the entity. Examples of costs that are not allowed include: retraining or relocating continuing staff; investment in new systems and distribution networks, etc., because these expenditures relate to the future operation of the enterprise and are not liabilities for restructuring at the reporting date.

5.       Events after the Reporting Period – HKAS 10




(a)       Events after the reporting period are those events, both favourable and unfavourable, that occur between the reporting date and the date on which the financial statements are authorized for issue (資產負債表以後發生的事項,是指那些在資產負債表日和財務報表批准公佈日之間發生的有利和不利的事項).
(b)       There are two types of such events:
(i)         adjusting events (調整事項) – those providing further evidence of conditions that existed at the end of the reporting period. These events must be adjusted for in the financial statements.
(ii)        non-adjusting events (非調整事項) – those that are indicative of conditions that arose after the reporting period. These do not require adjustment, but must be disclosed by note or otherwise if material.

5.2       Examples of adjusting events are:
(1)        the resolution after the end of the reporting period of a court case which, because it confirms that an entity already had a present obligation at the end of the reporting period, requires the entity to recognize a provision instead of merely disclosing a contingent liability or adjusting the provision already recognized;
(2)        the bankruptcy of a customer which occurs after the end of the reporting period and which confirms that a loss already existed at the end of the reporting period on a trade receivable account;
(3)        the discovery of fraud or error that show that the financial statements were incorrect; and
(4)        the sale of inventories after the year end at an amount below their cost.
(5)        non-current assets – the subsequent determination after the reporting period of the purchase price or sales proceeds of assets purchased or sold before balance sheet date.
(6)        Impairment – the receipt of information after the reporting period indicating that an asset was impaired at the reporting date.


5.3       Examples of non-adjusting events:
(1)        a major business combination after the end of the reporting period;
(2)        the destruction of a major production plant by a fire after the end of the reporting period;
(3)        abnormally large changes after the end of reporting period in asset prices or foreign exchange rates; and
(4)        a decline in market value of investments between the end of the reporting period and the date on which the financial statements are authorized for issue.
5.4       Dividends – if dividends are proposed or declared after the end of the reporting period, an entity cannot recognize them as a liability. The reason is that such proposed dividends do not meet the recognition criteria of a liability. The enterprise does not have a present obligation at the reporting date in respect of dividends proposed or declared after the reporting date.

HKAS 1 requires an entity to disclose the amount of dividends that were proposed or declared after the end of the reporting period but before the financial statements were authorized for issue. This disclosure is made in the notes to the accounts.

Examination Style Questions

I.      Provisions

Question 1 – HKAS 37
Mini Automobile Limited (“MAL”) signed a firm sales contract with Car Trading Inc. (“CTI”) on 1 May 2006. The contract specifies that 300 units of Mini Wagon II (“MW II”) have to be delivered before 28 February 2007 at a fixed price of HK$380,000 per unit. If the delivery is more than one month late, MAL will grant CTI a discount of 30 per cent on each delayed unit. The costs of production are HK$288,000 per unit. Up to 31 December 2006, MAL was only able to deliver 260 units. MAL will only be able to deliver another 20 units before 28 February 2007. The unexpected delay is due to a strike in one of the production plants.

MAL signed an agreement to lease premises for its show room for three years. According to the lease agreement, MAL is responsible for restoration of the premises to the original condition at the expiry of the lease term. As at 31 December 2006, MAL had already incurred HK$10,000,000 in renovating and decorating the showroom. MAL estimates that it will incur HK$800,000 to restore the premises to the original condition.

As at 31 December 2006, MAL was a defendant in a patent infringement lawsuit of its driving control system (“DCS”) that has a high probability of making a loss of HK$120,000,000. If MAL loses the case, the management will take legal action to claim the loss from the DCS developer. The Company’s lawyers advise that it is also highly probable that MAL will be successful in recovery of HK$100,000,000 from the DCS developer.


For each of the above situations, determine (i) whether a provision should be made; (ii) the amount of the provision, if any, in MAL’s balance sheet at 31 December 2006; and (iii) the required disclosure by reference to the relevant accounting standards.
                                                                                                                                      (14 marks)
(HKICPA QP Module A Financial Reporting September 2006 Q5)

Question 2 – HKAS 37
Darren Company Limited (“DCL”) is engaged in the manufacture of batteries. On the unaudited balance sheet as at 30 June 2008, it has recognised the following provisions as current liabilities:

(a)     A provision for late delivery penalty
In May 2008, DCL received a sales order for 7,000,000 units of rechargeable batteries for which the agreed delivery date is 31 August 2008. It is expected that DCL would earn a gross profit of HK$1 per unit. Due to a shortage in the supply of raw materials, at the balance sheet date, the management realised that they could only supply the goods at the earliest on 10 September 2008. According to the sales contract, DCL would compensate the customer for late delivery at HK$0.01 per unit per day.

(b)    A provision for annual safety inspection of the production line
The last inspection was carried out in June 2007. Due to a large backlog of sales orders, the management decided to postpone the annual inspection until mid-September 2008.

(c)     A provision for the loss on sales of aged finished goods
The products were manufactured in late 2006 with an expected normal usage period of 2 years from the date of production. Due to the short expiry period, they were sold at a price below cost in July 2008.

(d)    A provision for bonus payments to two executive directors
In accordance with the directors’ service contract, two executive directors are entitled to receive, in addition to monthly salaries, a bonus of equivalent to 5% of the profit before taxation and the accrued bonus.


Discuss the appropriateness of the provisions recognized by DCL.                               (13 marks)
                                                  (HKICPA QP Module A Financial Reporting February 2008 Q5)

Question 3
XPrint Limited (XP), a printer manufacturer, had the following balances under current liabilities as presented in its annual management accounts as at 31 March 2013:



Provision for discount coupon


Warranty provision


Litigation provision


XP has developed a new printers model and targets to promote it to its old customers. A letter was issued to 1,500 old customers to offer them a HKD500 discount to exchange the old model for the new one on or before 30 April 2013. It is expected that a profit will still be made at a discounted selling price.

XP provides a one year warranty provision for all the printers it sells. Customers can request a free of charge repair service during the warranty period. A provision of HKD400,000 was made per month. Total expenditure incurred for this service, mainly costs for labour and parts replacement, was HKD3,160,000 during the year, which represented around 0.8% of the sales in the previous year. The ratio for the past five years ranged from 0.64% to 1%. Total sales for the current year amounted to HKD437 million.

XP was named as a defendant in a writ of summons with a statement of claim by another printer producer in relation to the alleged infringement of patent of design, claiming for a sum of HKD9.6 million. XP intended to settle with the plaintiff out of court. An offer letter of HKD3.8 million in compensation was given to the plaintiff in January 2013 and a counter-offer of HKD5 million payable within one month was received in early March 2013. The Board of XP approved to accept the counter-offer of the plaintiff and made the payment on 20 April 2013. The lawyer issued a fee note of HKD650,000 to XP on 1 May 2013 for the relevant legal service provided during the year. Other than the existing HKD8 million provision relating to this case, XP had no other provision.


(a)     Explain and comment the appropriateness of the amount of the provisions recognised in the management accounts at 31 March 2013.                                                                                 (14 marks)
(b)     The marketing director wrote the following email to the chief financial officer on 29 March 2013: “We just concluded the contract terms of a television advertisement for the new products to be launched in the coming May with a cost of HKD1.8 million. As there was still an un-utilised budget of HKD1.2 million for marketing expenses for this year, I suggest making a partial provision for this expenditure first, please approve.”

Do you agree the recognition of the provision at 31 March 2013?                         (3 marks)
(HKICPA QP Module A Financial Reporting December 2013 Q4)

Question 4 – HKAS 16 and HKAS 37
Parental Holdings Limited (“PHL”) is a company incorporated in Hong Kong and is principally engaged in the production, distribution and marketing of cosmetic products. PHL has grown significantly over the last few years through merger and acquisition.

Construction of a new plant
PHL is planning to construct a new plant. A condition of being granted the licence by the government is that the new plant must be dismantled at the end of its life which is estimated to be 50 years and the land must be restored. The new plant is estimated to cost HK$200 million and will begin production on 1 January 2016. Depreciation is to be charged using a straight-line method.

It is estimated that it will cost HK$30 million (a net present value as at 1 January 2016 using a discount rate of 6% per annum) to remove and dismantle the plant at the end of its life. In addition to the cost of removal of the plant, additional costs to restore the land are expected due to production contamination. It is estimated that the cost relating to the contamination to the land caused by the production of the cosmetic products for the year 2016 will be HK$600,000 at net present value for the year ending 31 December 2016.


Assume that you are Sarah Lam, the accounting manager, and you are required to draft a memorandum in response to the questions raised by Ms. Agnes Cheng, a Director of PHL, as below.

“I understand that the new plant should be recognised as property, plant and equipment. Can you advise as to the basis and the way you calculate the carrying amount of the new plant and the related provisions as at 31 December 2016? What are their impacts on the statement of profit or loss for the year ending 31 December 2016?”   (12 marks)
                                                 (HKICPA QP Module A Financial Reporting June 2015 Case Q1)

Question 5
Forest Electricity Limited ("FEL") is a manufacturer of electricity appliances which owned two manufacturing plants in the PRC and one retail shop in Hong Kong. FEL has recurred losses in its operation of both manufacturing and retailing businesses. During its financial year ended 31 December 2014, the following transactions have taken place:

(a)     Due to the poor performance of FEL, the management has decided to terminate the operation of one of the manufacturing plants on 1 December 2014 while they have not yet announced this to all the employees on 31 December 2014. In the year of 2015, it is expected to incur operational costs of HK$8 million, cost of relocation of staff of HK$1 million and dismantling cost of plant of HK$4 million.                         (8 marks)
(b)     FEL has a long-term supply contract with a customer to provide 100,000 Product X at HK$20 each every year for a term of three years from 1 April 2014 to 31 March 2017. Up to 31 December 2014, FEL has delivered 50,000 Product X to the customer. Because of the increased material costs, the manufacturing cost is expected to be HK$22 each from 1 January 2015 onwards. On 15 December 2014, the management also informed the landlord of the retail shop to terminate the lease of the retail shop as at 31 December 2014. FEL has entered into the non-cancellable leasing arrangement for a term of five years at a monthly rent of HK$80,000. The unexpired lease term is three years from the end of 31 December 2014 and FEL is not allowed to sub-let the retail shop to other parties. (7 marks)
(c)     FEL provides a warranty on Product Y when these products are sold to customers and FEL has also entered into an insurance contract with an insurance company for the reimbursement of these costs. For every defective Product Y, HK$10 per unit will be paid by FEL to the customer while the insurance company would reimburse the same to FEL. FEL sold 800,000 units of Product Y during the year and it is estimated that 10% of these units would have been defective based on the historical pattern. On 15 January 2015, 10,000 units of Product Y are claimed and certified as defective by customers for each of whom the insurance company also reimbursed FEL on the same day.                                                                                                                              (5 marks)


Advise as to the accounting implications for each of the costs incurred in 2014 and 2015, and calculate the amounts to be recognised for each of the above events by FEL for the year ended 31 December 2014.
                                                                                        (20 marks – Approximately 36 Minutes)
                                                 (HKICPA QP Module A Financial Reporting December 2015 Q6)


Question 6 – HKAS 37 and HKFRS 3 (revised)
William is a public limited company and would like advice in relation to the following transaction.

William acquired another entity, Chrissy, on 1 May 2012. At the time of the acquisition, Chrissy was being sued as there is an alleged mis-selling case potentially implicating the entity. The claimants are suing for damages of $10 million. William estimates that the fair value of any contingent liability is $4 million and feels that it is more likely than not that no outflow of funds will occur.

William wishes to know how to account for this potential liability in Chrissy’s entity financial statements and whether the treatment would be the same in the consolidated financial statements.


Discuss, with suitable computations, the advice that should be given to William in accounting for the above event.                                                                                                                                        (4 marks)
                                                              (ACCA P2 Corporate Reporting (INT) June 2012 Q2(d))

Question 7 – HKAS 37
Nette, a public limited company, manufactures mining equipment and extracts natural gas. Nette has recently Œ constructed a natural gas extraction facility and commenced production one year ago (1 June 2003). There is an  operating licence given to the company by the government which requires the removal of the facility at the end of its life which is estimated at 20 years. Depreciation is charged on the straight line basis. The cost of the construction of the facility was $200 million and the net present value at 1 June 2003 of the Ž future costs to be incurred in order to return the extraction site to its original condition are estimated at $50 million (using a discount rate of 5% per annum). 80 per cent of these costs relate to the removal of the facility and 20% relate to the rectification of the damage caused through the extraction of the natural gas.  The auditors have told the company that a provision for decommissioning has to be set up.


Explain with reasons and suitable extracts/computations the accounting treatment of the above situation in the financial statements for the year ended 31 May 2004.                                                   (8 marks)
                                    (Adapted ACCA 3.6 Advanced Corporate Reporting June 2004 Q3(b)(i))

Question 8 – HKAS 8, HKAS 23, HKAS 37 and HKAS 1
Gear Software, a public limited company, develops and sells computer games software. The revenue of Gear Software for the year ended 31 May 2003 is $5 million, the balance sheet total is $4 million and it has 40 employees. There are several elements in the financial statements for the year ended 31 May 2003 on which the directors of Gear require advice.

(i)      Gear has two cost centres relating to the development and sale of the computer games. The indirect overhead costs attributable to the two cost centres were allocated in the year to 31 May 2002 in the ratio 60:40 respectively. Also in that financial year, the direct labour costs and attributable overhead costs incurred on the development of original games software were carried forward as work-in-progress and included with the balance sheet total for inventory of computer games. Inventory of computer games includes directly attributable overheads. In the year to 31 May 2003, Gear has allocated indirect overhead costs in the ratio 50:50 to the two cost centres and has written the direct labour and overhead costs incurred on the development of the games off to the income statement. Gear has stated that it cannot quantify the effect of this write off on the current year‘s income statement. Further, it proposes to show the overhead costs relating to the sale of computer games within distribution costs. In prior years these costs were shown in cost of sales.                                                                                    (9 marks)
(ii)     In prior years, Gear has charged interest incurred on the construction of computer hardware as part of cost of sales. It now proposes toŒ capitalise such interest and to change the method of depreciation from the straight-line method over four years to the reducing balance method at 30% per year. ŽDepreciation will now be charged as cost of sales rather than administrative expenses as in previous years. Gear currently recognises revenue on contracts in proportion to the progression and activity on the contract. The normal accounting practice within the industrial sector is to recognise revenue when the product is shipped to customers. The effect of any change in accounting policy to bring the company in line with accounting practice in the industrial sector would be to increase revenue for the year by $500,000.                                             (6 marks)

The directors have requested advice on the changes in accounting practice for inventories and tangible non-current assets that they have proposed.
(iii)    In relation to a failed acquisition, a firm of accountants has invoiced Gear for the sum of $300,000. ŒGear has paid $20,000 in full settlement of the debt and states that this was a reasonable sum for the advice given and is not prepared to pay any further sum. The accountants are pressing for payment of the full amount but on the advice of its solicitors, Gear is not going to settle the balance outstanding. Additionally Gear is involved in a court case concerning the plagiarism of software. Another games company has accused Gear of copying their games software and currently legal opinion seems to indicate that Gear will lose the case. Management estimates that the most likely outcome will be a payment of costs and royalties to the third party of $1 million in two years’ time (approximately). The best case scenario is deemed to be a payment of $500,000 in one year’s time and the worst case scenario that of a payment of $2 million in three years’ time. These scenarios are based on the amount of the royalty payment and the potential duration and costs of the court case. Management has estimated that the relative likelihood of the above payments are best case – 30% chance, most likely outcome – 60% chance, and worst case – 10% chance of occurrence. The directors are unsure as to whether any provision for the above amounts should be made in the financial statements.                                                              (7 marks)
(iv)    In the event of the worst case scenario occurring, the directors of Gear are worried about the viability of their business as the likelihood would be that current liabilities would exceed current assets and it is unlikely that in the interim period there will be sufficient funds generated from operational cash flows. (3 marks)

The discount rate for any present value calculations is 5%.


Write a report to the directors of Gear Software explaining the implications of the above information contained in paragraphs (i) – (iv) for the financial statements.                                                         (25 marks)
                                                          (ACCA 3.6 Advanced Corporate Reporting June 2003 Q3)

Question 9 – HKAS 2, HKAS 16 and HKAS 37
Wader, a public limited company, is assessing the nature of its provisions for the year ended 31 May 2007. The following information is relevant:

(a)     Wader is assessing the valuation of its inventory. It has a significant quantity of a product and needs to evaluate its value for the purposes of the statement of financial position. Sales of the product are high, but it incurs high production costs. The reason for its success is that a sales commission of 20% of the list selling price is paid to the sales force. The following details relate to this product:


$ per unit

List price – normal selling price


Allocation of customer discounts on selling price


Warehouse overheads until estimated sale date


Basic salaries of sales team


Cost of product


The product is collected from the warehouse of Wader by the customer.                      (4 marks)

(b)     Wader is reviewing the accounting treatment of its buildings. The company uses the ‘revaluation model’ for its buildings. The buildings had originally cost $10 million on 1 June 2005 and had a useful economic life of 20 years. They are being depreciated on a straight line basis to a nil residual value. The buildings were revalued downwards on 31 May 2006 to $8 million which was the buildings’ recoverable amount. At 31 May 2007 the value of the buildings had risen to $11 million which is to be included in the financial statements. The company is unsure how to treat the above events.                                                                                          (7 marks)

(c)     Wader has decided to close one of its overseas branches. A board meeting was held on 30 April 2007 when a detailed formal plan was presented to the board. The plan was formalised and accepted at that meeting. Letters were sent out to customers, suppliers and workers on 15 May 2007 and meetings were held prior to the year end to determine the issues involved in the closure. The plan is to be implemented in June 2007. The company wish to provide $8 million for the restructuring but are unsure as to whether this is permissible. Additionally there was an issue raised at one of the meetings. The operations of the branch are to be moved to another country from June 2007 but the operating lease on the present buildings of the branch is non-cancellable and runs for another two years, until 31 May 2009. The annual rent of the buildings is $150,000 payable in arrears on 31 May and the lessor has offered to take a single payment of $270,000 on 31 May 2008 to settle the outstanding amount owing and terminate the lease on that date. Wader has additionally obtained permission to sublet the building at a rental of $100,000 per year, payable in advance on 1 June. The company needs advice on how to treat the above under IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
(7 marks)


Discuss the accounting treatments of the above items in the financial statements for the year ended 31 May 2007.

Note: a discount rate of 5% should be used where necessary. Candidates should show suitable calculations where necessary.
                                                                                                                                     (18 marks)
                                    (ACCA 3.6 Advanced Corporate Reporting June 2007 Q2(b), (c) and (d))


Question 10 – HKAS 37
Greenie, a public limited company, builds, develops and operates airports. During the financial year to 30 November 2010, a section of an Œ airport collapsed and as a result several people were hurt. The accident resulted in the closure of the terminal and legal action against Greenie. When the financial statements for the year ended 30 November 2010 were being prepared, the investigation into the accident and the reconstruction of the section of the airport damaged were still in progress and  no legal action had yet been brought in connection with the accident. The Ž expert report that was to be presented to the civil courts in order to determine the cause of the accident and to assess the respective responsibilities of the various parties involved, was expected in 2011.

 Financial damages arising related to the additional costs and operating losses relating to the unavailability of the building. The nature and extent of the damages, and the details of any compensation payments had yet to be established. The directors of Greenie felt that at present, there was no requirement to record the impact of the accident in the financial statements.

 Compensation agreements had been arranged with the victims, and these claims were all covered by Greenie’s insurance policy. In each case, compensation paid by the insurance company was subject to a waiver of any judicial proceedings against Greenie and its insurers. If any compensation is eventually payable to third parties, this is expected to be covered by the insurance policies.

The directors of Greenie felt that the conditions for recognising a provision or disclosing a contingent liability had not been met. Therefore, ‘ Greenie did not recognise a provision in respect of the accident nor did it disclose any related contingent liability or a note setting out the nature of the accident and potential claims in its financial statements for the year ended 30 November 2010.


Discuss how the above financial transaction should be dealt with in the financial statements of Greenie for the year ended 30 November 2010.                                                                                              (6 marks)
                                                               (ACCA P2 Corporate Reporting December 2010 Q3(a))


II.      Events after Reporting Period (HKAS 10)

Question 11 – HKAS 10 and HKAS 20
In the preparation of the financial statements for the year ended 31 March 2012 of Star Workshop Inc. (SW), the financial controller identified the following transactions / events which happened after the end of the reporting period but before the date when the financial statements are authorised for issue:

(a)     A customer informed SW on 3 April 2012 that all the goods delivered to the customer's warehouse on 25 March 2012 were not produced in accordance with the agreed specification. SW reproduced the order and shipped the replacement goods to the customer on 10 April 2012. The invoice of HK$8 million issued on 25 March 2012 has not been cancelled and the customer had settled when it confirmed the acceptance of the replacement goods.                                                                                                                               (4 marks)
(b)     The production of a plant has been suspended since 15 April 2012 due to the sudden shortage of electricity supply. Sales orders of HK$15 million received in February 2012 with a planned production and delivery in May 2012 could not be fulfilled. According to the terms of the sale contracts, SW agreed to compensate the counterparty by 20% of the contract price for breach of contract.                                                         (4 marks)
(c)     (c) An official letter issued on 8 April 2012 by the local government regarding the approval of a subsidy of HK$5 million has been received. The subsidy was given to SW because of the employment of more than 1,000 local workers during the six months ended 31 December 2011. According to the published government notice, enterprises are encouraged to employ local workers and, subject to approval, a discretionary subsidy will be granted. SW applied for the subsidy on 8 March 2012.                                                                   (3 marks)


Discuss how the above transactions/events should be dealt with in the financial statements of SW for the year ended 31 March 2012.
                                                         (HKICPA QP Module A Financial Reporting June 2012 Q4)


Question 12 – HKAS 10
In the preparation of the financial statements for the year ended 31 December 2013 of Strong Ability Company Limited (SAC), the following events have taken place after the end of the reporting period but before the date when the financial statements are authorised for issue (i.e. 30 April 2014):

(a)     On 30 December 2013, the directors of SAC proposed final dividends for the year ended 31 December 2013 to the shareholders of SAC. Subsequently, the dividends were declared on 29 April 2014 and payable on 15 May 2014. Historically, SAC has the past practice of paying dividends.                                       (3 marks)
(b)     SAC built up an additional structure outside its premises in June 2013. On 30 November 2013, a notice was issued by the Building Authorities against the premises owner in relation to the unauthorised building works carried out during the year and SAC is required to rectify it on or before 30 June 2014. Otherwise, a maximum penalty of $400,000 will be imposed. The cost to remove the unauthorised building works is $500,000 and its removal was completed on 20 April 2014.                                                                                    (4 marks)
(c)     A disposal of certain production lines has been completed after approval from shareholders of SAC on 15 January 2014. The sale and purchase agreement was signed between SAC and the buyer on 30 November 2013 which has been approved by the board of directors but subject to the approval of the shareholders of SAC. (You should comment on the classification of these production lines as at 31 December 2013).       (5 marks)
(d)     The new Companies Ordinance has come into effect from 3 March 2014. The financial controller of SAC is considering the impact on financial reporting and the directors’ report. (You should advise not less than four changes in respect of these two areas).                                                                                   (4 marks)


Discuss the implications for each of the above events.
(HKICPA QP Module A Financial Reporting December 2014 Q7)

Question 13
Waxwork's current year end is 31 March 2009. Its financial statements were authorised for issue by its directors on 6 May 2009 and the AGM (annual general meeting) will be held on 3 June 2009. The following matters have been brought to your attention:

(a)     On 12 April 2009 a fire completely destroyed the company's largest warehouse and the inventory it contained. The carrying amounts of the warehouse and the inventory were $10 million and $6 million respectively. It appears that the company has not updated the value of its insurance cover and only expects to be able to recover a maximum of $9 million from its insurers. Waxwork's trading operations have been severely disrupted since the fire and it expects large trading losses for some time to come.                                                               (4 marks)
(b)     A single class of inventory held at another warehouse was valued at its cost of $460,000 at 31 March 2009. In April 2009 70% of this inventory was sold for $280,000 on which Waxworks' sales staff earned a commission of 15% of the selling price.                                                                                                      (3 marks)
(c)     On 18 May 2009 the government announced tax changes which have the effect of increasing Waxwork's deferred tax liability by $650,000 as at 31 March 2009.                                                           (3 marks)


Explain the required treatment of the items (i) to (iii) by Waxwork in its financial statements for the year ended 31 March 2009.

Note: assume all items are material and are independent of each other.    (10 marks as indicated)



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