Question

Restructuring is an action taken by a company to significantly modify the financial and operational aspects of the company. A restructuring can comprise numerous costly activities, including termination or relocation of a business, a change in management structure and lay-offs.

IFRS (IAS 37.72 specifically) require companies to recognize restructuring provisions (i.e., liability) and restructuring costs (i.e., expense) before the restructuring actually occurs, when “a detailed formal plan is adopted and has started being implemented, or announced to those affected”.

Requirements:

Using the conceptual framework, discuss

a) What are the definition of liability and the recognition criteria of liability?

b) Based on your discussion of part a), why does IAS 37.72 require a provision (i.e., liability) to be recognized when a company plans to close their business locations (i.e., before the actual closure) and only when “a detailed formal plan is adopted and has started being implemented, or announced to those affected”?

c) What is the impact of recording restructuring provisions on the company’s financial statement?

The shareholders and the investors get to know the actual position and the plans of the company to make better decision weather or not to invest in the company. It makes the financial statement more reliable and faithful to its investors and users.

Answer 1

1) Liabilities are the present obligation of the entity in the form of legally enforceable and result from past events. Liabilities will have future economic outflow from an entity.Those liabilities including account payable, salary payable, noted payable, accrual liabilities, short term loan, and long term loan.If the entity financial statements are prepared according to IFRS, then those liabilities should meet the recognition criteria of liabilities in the conceptual framework.

The following are the recognition criteria of liabilities from the conceptual framework:

A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. In practice, obligations under contracts that are equally proportionately unperformed (for example, liabilities for inventory ordered but not yet received) are generally not recognized as liabilities in the financial statements. However, such obligations may meet the definition of liabilities and, provided the recognition criteria are met in the particular circumstances, may qualify for recognition. In such circumstances, recognition of liabilities entails recognition of related assets or expenses.

3) The shareholders and the investors get to know the actual position and the plans of the company to make better decision weather or not to invest in the company. It makes the financial statement more reliable and faithful to its investors and users.