When the recognition of a provision gives rise to an asset An entity operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. 90% of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, with 10% expected to arise through the […]

Calculation of expected value An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor defects were detected in all products sold, repair costs of £1 million would result. If major defects were detected in all products sold, repair costs of £4 million […]

Calculation of a risk-adjusted rate A company has a provision for which the expected value of the cash outflow in three years’ time is £150, and the risk-free rate (i.e. the nominal rate unadjusted for risk) is 5%. However, the possible outcomes from which the expected value has been determined lie within a range between £100 and £200. The company is risk averse and would […]

Grant associated with investment property The government provides a grant to an entity that owns an investment property. The grant is intended to compensate the entity for the lower rent it will receive when the property is let as social housing at below market rates. That means that future rental income will be lower over the period of the lease which, at the same time, […]

Use of discounting and tax effect It is estimated that the settlement of an environmental provision will give rise to a gross cash outflow of £500,000 in three years time. The gross interest rate on a government bond maturing in three years time is 6%. The tax rate is 30%. The net present value of the provision is £419,810 (£500,000 × 1 ÷ (1.06)3). Hence, […]

Greencore Group plc (2010) Group Statement of Accounting Policies year ended 24 September 2010 [extract] Government Grants Government grants for the acquisition of assets are recognised at their fair value when there is reasonable assurance that the grant will be received and any conditions attached to them have been fulfilled. The grant is held on the Balance Sheet as a deferred credit and released to […]

Effect on future profits of choosing a real or nominal discount rate A provision is required to be set up for an expected cash outflow of €100,000 (estimated at current prices), payable in three years’ time. The appropriate nominal discount rate is 7.5%, and inflation is estimated at 5%. If the provision is discounted using the nominal rate, the expected cash outflow has to reflect […]

AB InBev NV (2010) 3. Summary of significant accounting policies [extract] (X) Income recognition [extract] Government grants A government grant is recognized in the balance sheet initially as deferred income when there is reasonable assurance that it will be received and that the company will comply with the conditions attached to it. Grants that compensate the company for expenses incurred are recognized as other operating […]

Effect on future profits of choosing a risk-free or risk-adjusted rate A company is required to make a provision for which the expected value of the cash outflow in three years’ time is £150, when the risk-free rate (i.e. the rate unadjusted for risk) is 5%. However, the possible outcomes from which the expected value has been determined lie within a range between £100 and […]

Danisco A/S (2010) Note 38 – Accounting policies [extract] Government grants Government grants, which are disclosed in a note, include grants for research and development, CO2 allowances and investments. Grants for research and development and CO2 allowances are recognised as income on a systematic basis to match the related cost. Investment grants are set off against the cost of the subsidised assets. 33 Government grants […]