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Wiley IFRS: Practical Implementation Guide and Workbook
their employment; when the plan will be implemented and the ex penditures that will be un–
dertaken ;
and
• Ha s
raised valid expectations
in the minds of those affected that the entity will carry out re–
struct uri ng by starting to imp lement that plan or annou nci ng its mai n features to those af–
fec ted by it.
Practical Insight
A deci sion taken by the board of directors of an entity co ntemplating embarki ng on a restruc –
turing program but not communicated to the pa rties affec ted by the decision (suc h tha t it cre–
ates a valid expectation in their mi nds that the restru ctu ring decision will in reality be imple–
mented) wo uld not by itself give rise to a cons truc tive obliga tion. Thus communicatio n of the
decision of the board of directors to parties affected is a prerequi site if an entity wa nts to make
a provision for "res truc turing" on the basis of a con stru cti ve obligation.
4.6.4 A res truc turi ng provision should include only dir ect ex penditures arising from the restruc–
turing, which are those that are nece ssaril y ent ailed by the restructuring and not assoc iated with the
ongoing activiti es of the entity.
4.6.5 The Stand ard has specifically excluded certa in types of expenditures as expenditure arisi ng
from restructuring
• Costs of retraining or relocating co ntinuing staff
• Market ing
• Investment in new sys tems and distribution networ ks
Case Study 4
Facts
The board of directors of ABC Inc. at their meeting held on December 15, 20X I, decided to close down
the entity's international branches and shift its international operations and consolidate them with its
domestic operations. A detailed formal plan for winding up the international operations was also for–
malized and agreed by the board of directors in that meeting. Letters were sent out to customers, suppli–
ers, and workers soon thereafter. Meetings were called to discuss the features of the formal plan to wind
up international operations, and representatives of all interested parties were presenting those meetings.
Required
Do the actions of the board of directors create a constructive obligation that needs a provision for re–
structuring?
Solution
The conditions prescribed by lAS 37 are
• There should be detailed formal plan of restructuring;
• Which should have raised valid expectations in the minds of those affected that the entity would
carry out the restructuring by announcing the main features of its plans to restructure.
The board of directors did discuss and formalize a formal plan of winding up the international opera–
tions. This plan was communicated to the parties affected and created a valid expectation in their minds
that ABC Inc. will go ahead with its plans to wind up international operations. Thus there is a construc–
tive obligation that needs to be provided at year-end.
4.7
Disclosures
4.7.1
For each class of provision , an entity should di sclose
• The ca rry ing amo unt at the beginning and the end of the period
• Additional pro vision s made in the period, incl uding increases to ex isting provisions
• Amo unts uti lized duri ng the period
• Unused amo unts re versed du ring the period
• The increase during the peri od in the discounted amo unt arising from the passage of time and
the effect of any change in the discount rate