Provisions are particular kinds of liabilities. It therefore follows that provisions should be…

Provisions are particular kinds of liabilities. It therefore follows that provisions should be recognised when the definition of a liability has been met. The key requirement of a liability is a present obligation and thus this requirement is critical also in the context of the recognition of a provision. However, although accounting for provisions is an important topic for standard setters, it is only recently that guidance has been issued on provisioning in financial statements. In the UK, the Accounting Standards Board has recently issued FRS 12 Provisions, Contingent Liabilities and Contingent Assets.

World Wide Nuclear Fuels plc disclosed the following information in its financial statements for the year ending 30 November 1999:

Provisions and long-term commitments

(i) Provision for decommissioning the Group’s radioactive facilities is made over their useful life and covers complete demolition of the facility within fifty years of it being taken out of service together with any associated waste disposal. The provision is based on future prices and is discounted using a current market rate of interest.

There are still decommissioning costs of £1231m (undiscounted) to be provided for in respect of the group’s radioactive facilities as the company’s policy is to build up the required provision over the life of the facility

Assume that adjustments to the provision due to change in knowledge about the accuracy of the provision do not give rise to future economic benefits. (7 marks)

(ii) The company purchased an oil company during the year. As part of the sale agreement, oil has to be supplied for a five year period to the company’s former holding company at an uneconomic rate. As a result a provision for future operating losses has been set up of £135m which relates solely to the uneconomic supply of oil. Additionally the oil company is exposed to environmental liabilities arising out of its past obligations, principally in respect of remedial work to soil and ground water systems, although currently there is no legal obligation to carry out the work. Liabilities for environmental costs are provided for when the Group determines a formal plan of action on the closure of an inactive site and when expenditure on remedial work is probable and the cost can be measured with reasonable certainty. However in this case, it has been decided to provide for £120m in respect of the environmental liability on the acquisition of the oil company. World Wide Nuclear Fuels has a reputation for ensuring that the environment is preserved and pro

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