Problem 4-5 Multiple choice (IFRS)

1. A legal obligation is an obligation that is derived from all of the following except

a. Legislation
b. A contract
c. Other operation of law
d. An established pattern of past practice

2. A provision should be recognized for which of the following?

a. Future operating losses

b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs

3. Provisions shall be recognized for all of the following except

a. Cleaning-up costs of contaminated land when an oil entity has a published

policy that it will undertake to clean up all contamination that it causes.
b. Restructuring costs after a binding sale agreement has been signed
c. Rectification costs relating to defective products already sold
d. Future refurbishment costs due to introduction of a new computer system

4. An entity is closing one of its operating divisions and the conditions for making
restructuring provision have been met. The closure will happen in the first quarter
of the next financial year. At the current year-end, the entity has announced the
formal plan publicly and is calculating the restructuring provision. Which of the
following costs should be included in the restructuring provision?

a. Retraining staff continuing to be employed

b. Relocation costs relating to staff moving to other divisions
c. Contractually required costs of retraining staff being made redundant from the
division being closed
d. Future operating losses of the division being closed up to the date of closure.

5. An entity operates chemical plants. Its published policies include a commitment to

making good any damaged caused to the environment by its operations. It has
always honored this commitment. Which of the following scenarios relating to the
entity would give rise to an environmental provision?

a. On the past experience it is likely that a chemical spill which would result in
having to pay fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entitys actions may
damage surrounding wildlife
c. The government has outlined plans for a new law requiring all environmental
damage to be rectified
d. A chemical spill from one of the entitys plants has caused harm to the
surrounding area and wildlife

ANSWERS:
1. D
2. D
3. D
4. C
5. D