Standards-based cases

Case questions in exams, audit files and interviews follow a pattern: a short fact pattern, a question ("How should this be accounted for?"), and credit for identifying the issue, finding the right standard, applying its criteria to the facts, and concluding with an entry and a disclosure. The lessons before this one gave you the tools — which framework, how to navigate a standard, the precise terms. This lesson puts them together.

The five-step method 1. Issue. State the accounting question in one sentence. "Whether Sadeem has a liability for warranty repairs at 31 December, and how much." A vague issue produces a vague answer. 2. Scope. Which standard covers it, and does any exclusion apply? Name it ("IAS 37") and check the scope paragraphs — a warranty that the customer can buy separately is a service under IFRS 15, not an IAS 37 provision. 3. Recognition. Apply each recognition criterion to the facts, one by one. For a provision: present obligation from a past event? Probable outflow? Reliable estimate? Most marks are here, and most errors are skipped criteria. 4. Measurement. The amount, initially and later, with the working shown. Long-dated items are discounted (leases, decommissioning, large provisions) — that's where present value enters. 5. Presentation and disclosure. Which line, current or non-current, what the notes say. Finish with the journal entry, and add one line if US GAAP would differ.

Worked through: Sadeem's warranty. Issue: is there a warranty liability at year end? Scope: an assurance-type warranty (it only promises the trolleys work as specified) is an IAS 37 provision; a separately priced extended warranty would be IFRS 15 revenue. Recognition: the sale created the obligation (past event); across hundreds of trolleys some repairs are probable (assessed for the class as a whole); experience gives a reliable 2% rate — all three met. Measurement: 2% × 400,000 = 8,000; repairs fall within a year, so discounting isn't material. Presentation: a current provision; the notes give the movement in the provision and the main assumptions. You'll record this entry in the exercises below.

Common ways to lose marks: quoting a standard without applying it to the numbers; "being prudent" with a provision the criteria don't support; forgetting to check whether an event after year end changes the answer; and stopping at the entry without saying how it's presented.

Measurement often involves present value. Long-dated obligations (decommissioning, leases) are discounted. IFRS 16 measures a lease liability at the present value of the lease payments, using the rate implicit in the lease or, if that can't be readily determined, the lessee's incremental borrowing rate. IAS 37 discounts provisions where the effect is material; and IAS 16 includes the initial estimate of dismantling and restoration costs in the cost of the asset.

Events after the reporting period (IAS 10). Events that give evidence of conditions existing at the reporting date are adjusting; events reflecting conditions that arose after it are non-adjusting and, if material, disclosed.

The cases below use Sadeem Logistics Co., an IFRS reporter with a 31 December year end.