IAS 37 Provisions, Contingent Liabilities and Contingent Assets normally requires separate provisions for onerous contracts.
IAS 37 defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. IAS 37 states that if an entity has a contract which is onerous, the present obligation under the contract shall be recognised and measured as a provision. Therefore, the contract is not an asset and should not be allocated to a CGU. IAS 37 further clarifies that before a separate provision for an onerous contract is established, an entity should recognise any impairment loss which has occurred on assets dedicated to that contract. If there are assets dedicated to an onerous contract, an entity recognises an impairment loss for those assets (or the CGU to which they belong) before a separate provision for the contract is established.
Certain intangible assets should be tested for impairment annually. If it is not possible to determine an individual asset’s recoverable amount, an entity shall determine the recoverable amount of the CGU to which the asset belongs. Impairment tests are sensitive to which level assets, or groups of assets, are identified as part of the CGU. Incorrect identification of a CGU may result in assets generating significant cash inflows erroneously being grouped with assets which may not generate cash flows.
This may result in impairments not being accounted for. A CGU should be determined consistently over time, unless a change is justified. Where an onerous contract is separated from the CGU, but a separate provision for the contract is not established, the financial statements will give an incomplete presentation of the total liabilities.
Therefore, the onerous contract should not be allocated to a CGU thereby changing its composition. The onerous contract provision for the gas storage contract should be recognised and an impairment loss calculated for the intangible asset in the financial reporting period to 31 May 2018.
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