Question

Evaluate whether the following situations will give rise to a present obligation:

I: Bona Bay Ltd is a large manufacturer of surfboards and provides a two year warranty for all its products from the time of purchase by offering to repair or replace the item.

II: Sea Eagle Ltd operates its offshore oil rigs near Curlew Beach. During the reporting period, there was a major oil spill and the company had publicly announced to undertake clean-up of all the contamination that it caused. There is no environmental legislation on oil spills.

III: A customer sued Neck Bay Ltd for damages from a faulty product. The company hired a legal team to dispute this claim.

IV: Whitehaven Ltd had guaranteed a bank loan to an associated company.

In compliance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets, which of the above situations requires recognition in the financial statements?

I, II and III

I and II

II and III

III and IV

Answer 1

In the case the answer will be option 2 i.e. I and II.

Explanation:

In cases III (of Neck Bay) and IV (of Whitehaven) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Also the amount of obligation cannot be measured with uncertainty. Hence III and IV will not be recognizes in the financial statements.

I and II will have to be recognized as per the provisions of AASB 137.