Question

How is the Provision for Reorganization and Restructuring recognized under IFRS?

Answer 1

• The reorganization and restructuring costs are dealt with as per IAS 37 - Provisions, Contingent Liabilities and Contingent Assets.
• A provision is a liability of uncertain amount or timing. An entity recognises a provision if there is a probable cash outflow or if the economic resources will be required to settle the provision in future. If there is no probable cash outflow, the item is treated as a contingent liabilities.
• The Restructuring costs associated with reorganising divisions ascertain two issues:

1. To assess whether an obligation exists at the reporting date.

2. Consideration for which the provision is created.

• Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a restructuring provision is recognised only after complying with both the following conditions:

1. There exists a detailed formal plan for the restructuring, and

2. A company has raised a valid expectation that the plan will be implemented

• As soon as there is a present obligation (legal or constructive) resulting from a past event, and a reliable estimate of costs can be made, the Restructuring costs are recognised.

• Therefore, the key challenge is to determining whether a constructive obligation exists, for deciding when to record a restructuring provision.