IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

(3) Unlawful environmental damage for dumping waste in the river near its factory; environmental–

ists are claiming unspecified damages as cleanup costs

Legal counsel is of the opinion that not all the legal cases are tenable in law and has communicated to

Amazon Inc. this assessment of the three lawsuits:

Lawsuit 1:

The chances of this lawsuit are remote.

Lawsuit

is probable that Amazon Inc. would have to pay the displaced employees, but the best

estimate of the amount that would be payable if the plaintiff succeeds against the entity is $2 mil–

lion.

Lawsuit

3: There is no current law that would compel the entity to pay for such damages. There may

be a case for constructive obligation, but the amount of damages cannot be estimated with any reli–

ability.

Required

What should be the provision that Amazon Inc. should recognize or the contingent liability that it should

disclose in each of the lawsuits, based on the assessments of its legal counsel?

Solution

Lawsuit 1:

Because the probability of an outflow of economic benefits is remote, no provision or

disclosure is required.

Lawsuit

2: Because it is probable ("more likely than not") that Amazon Inc. would ultimately have

to pay the dues to the displaced employees and the best estimate of the settlement is $2 million (as

against the claim of $3 million), Amazon Inc. would have to make a provision for $2 million.

Lawsuit

3: There is no legal obligation, but there is a constructive obligation. However, an estimate

of the obligation with reasonable reliability is not possible. Hence this qualifies for disclosure as a

contingent liability because it cannot be recognized as a provision (as it does not meet all the pre–

scribed conditions for recognition of a provision).

6. CONTINGENT ASSETS (Possible Assets)

Contingent assets are

possible assets

that arise from a past event and whose existence is confirmed

only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within

the control of the entity.

7. INTERPRETATION OF lAS 37 (IFRIC)

7.1

IFRIC Interpretation

IFRIC 1 is titled

Changes in Existing Decommissioning, Restoration and Similar Liabilities.

lAS

37 contains requirements on how to measure decommissioning, restoration, and similar liabilities.

IFRIC 1 provides guidance on how to account for the effect of changes in the measurement of ex–

isting decommissioning, restoration. and similar liabilities. This IFRIC interpretation addresses the

issue of how the effect of a change in the current market-based discount rate (as defined in lAS 37)

should be accounted for. According to the "consensus," the periodic unwinding of the discount

shall be recognized in profit or loss as a finance cost as it occurs. (The allowed alternative treat–

ment of capitalization of borrowing costs under lAS 23 is not permitted.)

7.2

IFRIC Interpretation

7.2.1 This interpretation applies to accounting in the financial statements of a contributor for in–

terests arising from decommissioning funds. As per the "consensus," the contributor shall recog–

nize its obligation to pay decommissioning costs as a liability and recognize its interest in the fund

separately unless the contributor is not liable to pay decommissioning costs even if the fund fails to

pay.

7.2.2 Further, if the contributor does not have control, joint control, or significant influence over

the fund, the contributor shall recognize the right to receive reimbursement from the fund as a re–

imbursement in accordance with lAS 37. This reimbursement should be measured at the lower of

(a) The amount of decommissioning obl igation recognized; and

(b) Contributor's share of fair value of the net costs of the fund attributable to contributors.