64 (a) The existing standard dealing with provisions HKAS 37, Provisions, Contingent Liabilities and Contingent Assets,
has been in place for many years and is sufficiently well understood and consistently applied in most areas.
Standard setters have felt it is time for a fundamental change in the underlying principles for the recognition and
measurement of non-financial liabilities. To this end, the International Accounting Standards Board (IASB) has
issued an Exposure Draft, ‘Measurement of Liabilities in IAS 37 – Proposed amendments to IAS 37’. The Hong
Kong Institute of Certified Public Accountants has also invited its members and other interested parties to
comment on the exposure draft.
Required:
(i) Discuss the existing guidance in HKAS 37 as regards the recognition and measurement of provisions
and why standard setters feel the need to replace existing guidance; (9 marks)
(ii) Describe the new proposals that the IASB has outlined in the Exposure Draft. (7 marks)
(b) Royan, a public limited company, extracts oil and has a present obligation to dismantle an oil platform at the end
of the platform’s life, which is 10 years. Royan cannot cancel this obligation or transfer it. Royan intends to carry
out the dismantling work itself and estimates the cost of the work to be $150 million in 10 years time. The
present value of the work is $105 million.
A market exists for the dismantling of an oil platform and Royan could hire a third party contractor to carry out
the work. The entity feels that if no risk or probability adjustment were needed then the cost of the external
contractor would be $180 million in ten years time. The present value of this cost is $129 million. If risk and
probability are taken into account, then there is a probability of 40% that the present value will be $129 million
and 60% probability that it would be $140 million, and there is a risk that the costs may increase by $5 million.
Required:
Describe the accounting treatment of the above events under HKAS 37 and the possible outcomes under the
proposed amendments in the Exposure Draft. (7 marks)
Professional marks will be awarded in question 4 for the quality of the discussion. (2 marks)
(25 marks)
End of Question Paper
