Exercise 1 - IAS 37

Beta S.p.A. signs an agreement with one of its top managers in order to pay him a lumpsum if the ownership
of the company will change in the future.

QUESTION

According to IAS 37, is the company obligated to account a provision for this event?

Exercise 2 - IAS 37

A company has received 100 claims from customers. Each claim has the 40% of probability to be closed
without expenditures for the company, and 60% of probability to be settled with an estimated outflow of 1
million per claim.

QUESTION

According to IAS 37, is the company obligated to account a provision for this event? If YES, how much should
be the provision?

Exercise 3 - IAS 37

At the end of the 2010 fiscal year the Company EXAMPLE expects to pay in 2015 a settlement for a claim for
about 150.000 for the damages caused to an employee. The discount rate is estimated to be 6% and the
annual inflation rate 3%.

QUESTION

According to IAS 37, what is the present value of the obligation for the Company?

Exercise 4 - IAS 37

Company Alfa closed its financial statements on December 31, each year. The company decided to move its
accouting principles to IAS/IFRS during the FY 2013. The financial statements as of 31 December 2013 will be
the first prepared according to IAS/IFRS. A claim against the company was promoted by a client in march
2013 asking damages for a total amount of Euro 1.5 million; management of the company think that the loss
in the claim is more probable that not. The company appointed its lawyers in order to discuss the claim in
front of the court. The lawyers of Alfa prepare a document for the board of directors that summarizes the
reasons of the company and estimates a probable transaction with the client will cost about Euro 0.9 million
to the Company; the document is completed on the beginning of April 2014.

QUESTIONS

1) Generally speaking, is the event described above something that requires a provision according to IAS 37?
2) What is the Transition Date for the company?
3) If the answer to question 1 is YES, according to IFRS 1 is the provision to be accounted for retrospectively
and, if YES, in what year?
4) What is the correct amount to be accounted for the provision at the end of FY 2013 according to IAS/IFRS
framework?
5) Are there additional bookkeeping to add after 31 December 2013? If YES, what bookkkepings must be
done?
Solutions

Exercise 1

No, the related event is only possible and therefore this is a contingent liability to disclose in the notes to
the financial statements.

Exercise 2

a. YES
b. The provision amount to Euro 100 million.

Exercise 3

Real discount rate calculation =(1+DR)/(1+IR) 2,91%

IR Inflation Rate 3%
DR Discount Rate 6%

Present Value

Payment 150.000
PV 129.942

Exercise 4

1. YES (the event is more probable than not)

2. 01/01/2012 (or 31/12/2011)
3. NO the information became available in FY 2013
4. 1.5 €/million the information about the probable transaction become available in FY 2014
5. 0.6 €/million the provision must be corrected in FY 2014 according to the new set of information
the correction of € 0.6 million is accounted in the profit & loss of Alfa as a gain