2 A main focus of IAS 37 is Big Bath provisions Explain what is meant by big

2 a main focus of ias 37 is big bath provisions

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2. A main focus of IAS 37 is “Big Bath” provisions. Explain what is meant by “big bath” accounting and discuss whether the requirements of IAS 37 will be successful in preventing this practice.Basic answerBig bath accounting involves making provisions in order to smooth profits without any reasonable certainty that the provision will actually be required in subsequent periods.Give example of how this is achieved.Objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions etc. and to ensure adequate disclosure.If recognition of a provision were allowed to proceed on intention to incur expenditure rather than an obligation then potential for creative accounting.Key principle is that a provision should only be recognized when there is a liability.Requirements of IAS 37 do go some way to preventing abuse but still a very subjective standard.
McKeith and Collins, Financial Accounting & Reporting, 2ndeditionGood answerBig bath can be used in a number of ways i.e. by making an existing loss even bigger to “hide all the bad news at once”, or to turn a profit into a loss; to “clear up” accounts before or after an acquisition.IAS 37 identifies specific areas that were the subject of abuse – restructurings, future operating losses and onerous contracts.IAS 37 requirement that a provision should only be used for the purpose for which it was originally established. Difficulty: Level IIMcKeith - Chapter 08 #47McKeith Chapter 083. Discuss the extent to which restructuring costs should be recognized in thefinancial statements.Basic answerAlthough a general standard, IAS 37 mentions specifically how the recognition and measurement rules should be applied to restructuring costs.The answer should begin with a definition of a restructuring and examples.The accounting issue involved should be explained i.e. at which point a present obligation arises as a result of a past event and then circumstances given i.e. when the constructive obligation to restructure arises.Explanation of specific restructurings-sale of operation – accrue only if a binding sale agreement is in place
McKeith and Collins, Financial Accounting & Reporting, 2ndedition-closure or reorganisation – accrue only if a detailed formal plan exists and it has been announced publicly-future operating losses – no provision for future operating losses-only direct expenditures caused by restructuringGood answer

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