ExpertMedium2 marksMultiple Choice
ACCA · Question 08 · Provisions and Contingencies
Section A
LogisticsPro entered into a non-cancellable contract to lease a warehouse for 3 years. Due to a sudden shift to remote operations, the warehouse is now completely vacant and cannot be sublet. The present value of the remaining lease payments is $150,000. The cost to break the lease early is a penalty of $120,000.
What provision should LogisticsPro recognize under IAS 37 for this onerous contract?
Section A
LogisticsPro entered into a non-cancellable contract to lease a warehouse for 3 years. Due to a sudden shift to remote operations, the warehouse is now completely vacant and cannot be sublet. The present value of the remaining lease payments is $150,000. The cost to break the lease early is a penalty of $120,000.
What provision should LogisticsPro recognize under IAS 37 for this onerous contract?
Answer options:
A.
$150,000
B.
$120,000
C.
$270,000
D.
$0, because it is a lease and falls under IFRS 16.
How to approach this question
Identify the unavoidable costs of meeting the obligations under the contract. This is the lower of the cost of fulfilling it and any compensation/penalties from failing to fulfill it.
Full Answer
B.$120,000✓ Correct
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an onerous contract is one where the unavoidable costs of meeting the obligations exceed the economic benefits expected. The provision is measured at the present value of the lower of the cost of fulfilling the contract ($150,000) and any penalties for terminating it ($120,000).
Common mistakes
Providing for the full remaining lease payments without considering the cheaper penalty option.
Practice the full ACCA FR — Financial Reporting Practice Exam 4
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