To provide or not?

cornflower

Can somebody solve a bit of a contentious issue.

Here's the story. Say a client has prepared a reorganisation plan which has been approved before the year end, and involves closing 6 branches but the client has yet to decide which branch so is doing a bit more research but has announced its plans to reorganise and had worked out an estimate of how much it will cost . should this be a provision in the year end accounts?

Most of our team agree it should but our ACCA part qualified says it shouldn't but can't give a proper reason why.

coojee

You can't provide for it because it doesn't affect the year end accounts. Provisions can only be made for things which are in existence at the year end. Had the branches actually been closed at the year end but no costs made yet (unlikely I know) then you could provide for the costs. But the branches haven't yet been closed so you've nothing to "match" it against. You could disclose it as a note to the accounts but I still don't think that IAS 37 applies because the branches haven't yet been closed.

cornflower

The way that my supervisor has said is that the decision to close the branches was made before the year end accounts were done so they had worked out redundancy costs etc and included them. The other senior is saying that they can't provide because they haven't yet paid them??

*Bangs head against wall*

Steve Collings

Hi,

Purely based on the facts in your post, I would not be making a provision in the accounts. Granted, the client has worked out the redundancy costs, approved the reorganisation before the year-end and made a public accouncement - all of which would seem plausible to meet the three criteria in FRS 12 (IAS 37). One of the criteria in FRS 12/IAS 37 is a 'constructive obligation' which has to be present. Such a construtive obligation only arises when the company has a detailed formal plan for restructuring and announces details of the plan to those who will be affected by it. From what is being said in your initial post, the client has only made an announcement "generally" - it has not made the announcement to those who will be directly affected and therefore there isn't enough detail in the plan (indeed you say that management are still deciding which branches to close) in order to recognise a construtive obligation, and thus a provision.

Kind regards

Steve