Strruggling
Gill Gittings
Registered Posts: 121 Dedicated contributor 🦉
Hello everybody
Can someone help me with this problem? An entity restructures and agrees during December 2010 a plan to reduce staff by 100 in February this year. Management makes an offer of £5,000 for voluntary redundancy at the end of January this year. If sufficient staff do not accept the offer management will terminate the employment of additional staff to reach the 100 target. Employees terminated involuntarily are entitled to a termination payment of £4,000 each and the estimate made by management is that 60 employees will accept the voluntary termination.
How much would the provision be at the end of December??
Really fluxed with this!
Gill x
Can someone help me with this problem? An entity restructures and agrees during December 2010 a plan to reduce staff by 100 in February this year. Management makes an offer of £5,000 for voluntary redundancy at the end of January this year. If sufficient staff do not accept the offer management will terminate the employment of additional staff to reach the 100 target. Employees terminated involuntarily are entitled to a termination payment of £4,000 each and the estimate made by management is that 60 employees will accept the voluntary termination.
How much would the provision be at the end of December??
Really fluxed with this!
Gill x
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Comments
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Surely nothing as management haven't communicated this by the end of December.0
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Is this a study or real life question?0
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Thankyou Beverly. It is a student question and I have posted in wrong forum. It was a question for ACCA written by my tutor but surely it can't be as simple as nothing? I'm not even sure what area it is testing.0
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It must be nil as it doesn't qualify for recognition as provision.Your tutor needs to be more detailed in their questions!0
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Thats what I thought Beverly but my friend says it is testing employee benefits but I can't see how
Think I'll go for a walk.0 -
This is a provisions question and the answer is no provision.0
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But why go into so much detail for a simple yes or no answer?0
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char
I would say no provision in 2010. This all relates to 20110 -
I think they want you to explain why and not just answer a yes or no. You would have to explain why the provision relates to 2011 etc. It also depends if the answer actual says answer yes or no only. Usually a yes or no answer is not enough and you may have to explain yourself0
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I agree with Beverley, the tutor is testing whether a provision should be made.
If you look at IAS 37 there is a specific note in the provision which I have copied below:
Circumstance - restructure or closing of a division
Provision - Accrue a provision only after a detailed formal plan is adopted and announced publicly. A Board decision is not enough.
If you google the standard you will find quite a bit in it relating to this specific instance
There is a flow chart in relation to this standard which you need to learn to know whether to provide for certain circumstances.
That would form the basis of your answer, is it a present obligation from a past event, is it measurable, is it probable, will it result in an outflow of resources etc. It's actually a good question in by going through the process described in the standard it forms the answer plan and shows your knowledge which is applied in every provision question
Does that help?0 -
Hi,
I'm going to play devils advocate and say this question is not testing provisions and is testing employee benefits.
This is an IAS 19 question because it is testing the measurement criteria as opposed to whether it is a provision in the traditional sense. If you look deep into the technicalities of IAS 19 you will see that (paragraph 140 of IAS 19) an amount recognised as a provision should be measured at the expected amount to be paid.
In your scenario management have AGREED a plan. OK, the offers to pay occur after, but the criteria in IAS 37 is recognised at the reporting date due to the plan being agreed (in the absence of any further information such as dates of announcement etc).
The principles contained in IAS 19 would suggest that a provision for termination benefits of (40 employees x £4,000 plus 60 employees at £5,000) = £460,000 would be recognised. A contingent liability of £40,000 for the additional amount that would be payable if the maximum number of employees accepted the voluntary termination would also be disclosed.
Remember, the measurement of voluntary termination benefits should be based only on the number of employees EXPECTED to make the offer.
Best wishes
Steve0 -
Steve with all due respect I don't think you are right. This is a provisions question.0
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So really it is testing both IAS's?
IAS 37 as to whether the provision should be made in the first place and IAS 19 as to the amount to be provided.
However I would ask now if it is a question relating to P2 or F7 as Employee benefits are covered in P2 only (I think).
Gill - i bet you never realised you would cause this amount of disagreement - lol0 -
Hi Beverly
I can see how it can be interpreted as a provisions question but some questions (particularly revision standard questions) are written to see if students digress into areas where the Q is not directed at. This has got IAS 19 written all over it but lots of students will ramble on about provisions. The question itself is far too vague to be a provisions question - as you can see I have had to make an assumption that a provision is recognisable merely by using one word - 'agreed'. The rest is all about IAS 19.
Best wishes
Steve0 -
Steve I'm sorry but I write questions and mark exams and this is a provisions question. Sorry.0
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Sorry for all the confusion. I have managed to ring my tutor on her mobile to clarify this and yes it is an IAS 19 question. Apparently she forgot to type the heading out so thanks for all your help.
steve I have got the answer now and thanks for your explanation, it is spot on to the answer.
Thanks
Gill xx0 -
OK Gill, thanks for clarifying.
Good luck with your studies. Are you P2 or F7.
Regards
Steve0 -
Hi Gill
Glad you have the answer, is it F7 or P2 that you are studying?0 -
Hi
I am studying for P2 but I am not sure how I am going to get through it if my questions are as confusing as this.
Gill xx0 -
Ahhh makes more sense now, I passed P2 2 years ago but I would have got caught out on this one as I would have said that the formal announcement hadn't been made so no provision! Shows its not all as cut and dried as we think!!
Boy am I glad that I'm not an auditor
However remember that P2 is known as 'the beast' for a reason!! The only thing that will get you through is lots and lots of question practice, I remember doing the question relating to foreign translations about 5 times and not once getting everything right!!0 -
Char
At the end of Gills question she did ask how much provision should she have for December 2010. Therefore I think it was taken as a provision question0 -
charlenebb wrote: »At the end of Gills question she did ask how much provision should she have for December 2010. Therefore I think it was taken as a provision question
That is absolutely correct Charlenebb - the problem with this question is that it is not testing the concept of provisions, more how much the provision should be. IAS 37 criteria have been met, but the question is requiring the student to calculate the provision in accordance with IAS 19 criteria.
Students need to be careful with questions like this at ACCA level as this is exam standard. Lots of students would have written lengthy answers about IAS 37 and scored zero as I strongly suspect no marks would have been available for provisioning answers if the concept of IAS 19 was being wholly tested.
Best wishes
Steve0 -
I don't think IAS 37 would permit this provision in any instance. The question is quite confusing.0
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beverly hudson wrote: »I don't think IAS 37 would permit this provision in any instance. The question is quite confusing.
Beverly, the question is not testing IAS 37 principles. IAS 37 principles are in the scenario but criteria have been met therefore we forget about provisioning. The final part of the scenario requires the student to calculate the provision - therefore there is no question that IAS 37 criteria have/have not been met. Students would have to push provisioning criteria to the back of their minds and concentrate on calculating the provision in accordance with IAS 19.
In my opinion this is an excellent, exam standard, question (not a 25 marker mind) but certainly one which illustrates how standards interact and students can be 'caught out'.
Best regards
Steve0 -
Steve Collings wrote: »Beverly, the question is not testing IAS 37 principles. IAS 37 principles are in the scenario but criteria have been met therefore we forget about provisioning. The final part of the scenario requires the student to calculate the provision - therefore there is no question that IAS 37 criteria have/have not been met. Students would have to push provisioning criteria to the back of their minds and concentrate on calculating the provision in accordance with IAS 19.
In my opinion this is an excellent, exam standard, question (not a 25 marker mind) but certainly one which illustrates how standards interact and students can be 'caught out'.
Best regards
Steve
Steve, are you sure you don't want to be a tutor? Even I would have been caught out with that question and I have been a BPP tutor for 11 years but yes, you are right.0 -
Ok Steve I accept what you are saying but with all due respect I have been a tutor for a long time and know about interpretation etc.0
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beverly hudson wrote: »Ok Steve I accept what you are saying but with all due respect I have been a tutor for a long time and know about interpretation etc.
I am also a tutor and I would have got confused with this question had it not been clear which standard was being tested. You should appreciate that students need to be clear on these issues which is why Steve intervened with the correct interpretation.0 -
Some recommended reading, Beverly
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haha, I'm reading that at the moment in the mornings. It's quite a good and interesting read actually!0
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