Contractual rights to cash in termination arrangements The facts of the SCA are as in Example 28.1 above. At the end of the term, the grantor will either pay for the infrastructure assets at their net book value, determined on the basis of the contract, or it may decide to grant a new SCA on the basis of a competitive tender, which will exclude the […]

Telenor ASA (2010) Notes to the financial statements /Telenor Group [extract] 19. Intangible assets [extract] DTAC operates under a concession right to operate and deliver mobile services in Thailand granted by the Communication Authority of Thailand (“CAT”). CAT allows DTAC to arrange, expand, operate and provide the cellular system radio communication services in various areas in Thailand. The concession originally covered a 15-year period but […]

Executory and contractual obligations to maintain and restore the infrastructure The operator under a water supply service concession is required as part of the overall contractual arrangement to replace four water pumps as soon as their performance drops below certain quality levels. The operator expects this to be the case after 15 years of service. The expected cost of replacing the pumps is CU 1,000. […]

Recognising a provision because of a constructive obligation Scenario 1; Environmental policy – contaminated land An entity in the oil industry operates in a country with no environmental legislation. However, it has a widely published environmental policy in which it undertakes to clean up all contamination that it causes and it has a record of honouring this published policy. During the period the entity causes […]

No provision without a past obligating event The government introduces a number of changes to the income tax system. As a result of these changes, an entity in the financial services sector will need to retrain a large proportion of its administrative and sales staff in order to ensure continued compliance with financial services regulation. At the end of the reporting period, no training has […]

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, […]