represents a change of accounting policy and therefore wish to treat the write off as a prior period

adjustment.
(e) A provision for income tax for the year to 31 March 20X1 of $15 million is required.
Required
(a) Prepare the statement of profit or loss of Winger for the year to 31 March 20X1. (9 marks)
(b) Prepare a statement of financial position as at 31 March 20X1 in accordance with International
Accounting Standards as far as the information permits. (11 marks)
(Total = 20 marks)
Note. As you have not yet covered IAS 1 Presentation of Financial Statements, you do not need to comply
with its detailed requirements.

11 Global Konstruckshen
Global Konstrukshen Co is a civil engineering company. It started work on two long-term projects during
the year ended 31 December 20X0. The following figures relate to those projects at the reporting date.
Alpine bypass World Ecology Centre
$'000 $'000
Contract price 9,000 8,000
Costs incurred to date 1,400 2,900
Estimated costs to completion 5,600 5,200
Value of work certified to date 2,800 3,000
Cash received from contractee 2,600 3,400
An old mineshaft has been discovered under the site for the World Ecology Centre and the costs of dealing
with this have been taken into account in the calculation of estimated costs to completion. Global's
lawyers are reasonably confident that the customer will have to bear the additional costs which will be
incurred in stabilising the land. If negotiations are successful then the contract price will increase to $10m.
Global recognises turnover and profits on long-term (construction) contracts on the basis of work certified
to date.
Required
(a) Calculate the figures which would appear in Global Konstrukshen's financial statements in respect
of these two projects.
(b) It has been suggested that profit on construction contracts should not be recognised until the
contract is completed. Briefly explain whether you believe that this suggestion would improve the
quality of financial reporting for long-term contracts.

12 Provisions 45 mins
IAS 37 Provisions, contingent liabilities and contingent assets was issued in 1998. Prior to its publication,
there was no International Accounting Standard that dealt with the general subject of accounting for
provisions.
Extract prepares its financial statements to 31 December each year. During the years ended 31 December
20X0 and 31 December 20X1, the following event occurred.
Extract is involved in extracting minerals in a number of different countries. The process typically involves
some contamination of the site from which the minerals are extracted. Extract makes good this
contamination only where legally required to do so by legislation passed in the relevant country.
The company has been extracting minerals in Copperland since January 20W8 and expects its site to
produce output until 31 December 20X5. On 23 December 20X0, it came to the attention of the directors
of Extract that the government of Copperland was virtually certain to pass legislation requiring the making
good of mineral extraction sites. The legislation was duly passed on 15 March 20X1. The directors of

488 Exam question bank

 11 Global Konstrukshen
Tutor's hint. Calculate profit or loss on the contract and cost of sales comes out as a balancing figure. You
can then work out the accrued cost of sales and accrued future losses.

(a) Alpine bypass World Ecology centre

$'000 $'000
Turnover 2,800 3,000
Profit/(loss) (W) 622 (100)
Cost of sales 2,178 3,100
Current assets
Amount recoverable on contract (2,800 – 2,600) 200 –
Current liabilities
Payment on account (3,400 – 3,000) – (400)
Accrued cost of sales (2,178 – 1,400) (778) –
Accrued future losses (3,100 – 2,900) – (200)
2,800
(W) Alpine: (9,000 – (1,400 + 5,600) = 622
9,000
World Ecology: 8,000 – (2,900 + 5,200) = 100
(b) Construction contracts are recognised as such when they cover at least two accounting periods. If
they were not to be treated as they are under IAS 11 then the costs incurred during the early years
of the contract would be recognised but with no corresponding turnover. This would lead to several
years of losses then one year of high profits regardless of how profitable the contract really was.
The advantage of this approach however would be that there would be no need to use estimates
and forecasts.
The current treatment matches an element of the turnover to the costs incurred. There is an
attempt to maintain prudence by ensuring that any foreseeable losses are accounted for
immediately. This gives a fairer representation of the underlying financial substance of the
transaction and makes it easier for the user of the accounts to assess the financial position of the
company.

12 Provisions
Tutor's hint. A good knowledge of IAS 37 is needed in this question. Do not disregard the discounting
aspects, these calculations are quite straightforward as you are given the formulae in the exam.

(a) Why there was a need for an accounting standard dealing with provisions
IAS 37 Provisions, contingent liabilities and contingent assets was issued to prevent entities from
using provisions for creative accounting. It was common for entities to recognise material
provisions for items such as future losses, restructuring costs or even expected future expenditure
on repairs and maintenance of assets. These could be combined in one large provision (sometimes
known as the 'big bath'). Although these provisions reduced profits in the period in which they
were recognised (and were often separately disclosed on grounds of materiality), they were then
released to enhance profits in subsequent periods. To make matters worse, provisions were often
recognised where there was no firm commitment to incur expenditure. For example, an entity
might set up a provision for restructuring costs and then withdraw from the plan, leaving the
provision available for profit smoothing.

526 Exam answer bank