Document ID: chunk:federal_register_of_legislation:F2023C00419:body:0:p25
Version: federal_register_of_legislation:F2023C00419
Segment Type: other
Provision Reference: 
Character Range: 64172–66842

of refunds (see paragraphs 10 (the definition of a constructive obligation), 14, 17 and 24).

Example 5A  Closure of a division – no implementation before end of the reporting period
On 12 December 20X0 the board of an entity decided to close down a division. Before the end of the reporting period (31 December 20X0) the decision was not communicated to any of those affected and no other steps were taken to implement the decision.
Present obligation as a result of a past obligating event – There has been no obligating event and so there is no obligation.
Conclusion – No provision is recognised (see paragraphs 14 and 72).

Example 5B  Closure of a division – communication/implementation before end of the reporting period
On 12 December 20X0, the board of an entity decided to close down a division making a particular product. On 20 December 20X0 a detailed plan for closing down the division was agreed by the board; letters were sent to customers warning them to seek an alternative source of supply and redundancy notices were sent to the staff of the division.
Present obligation as a result of a past obligating event – The obligating event is the communication of the decision to the customers and employees, which gives rise to a constructive obligation from that date, because it creates a valid expectation that the division will be closed.
An outflow of resources embodying economic benefits in settlement – Probable.
Conclusion – A provision is recognised at 31 December 20X0 for the best estimate of the costs of closing the division (see paragraphs 14 and 72).

Example 6  Legal requirement to fit smoke filters
Under new legislation, an entity is required to fit smoke filters to its factories by 30 June 20X1. The entity has not fitted the smoke filters.
(a) At 31 December 20X0, the end of the reporting period
Present obligation as a result of a past obligating event – There is no obligation because there is no obligating event either for the costs of fitting smoke filters or for fines under the legislation.
Conclusion – No provision is recognised for the cost of fitting the smoke filters (see paragraphs 14 and 17–19).
(b) At 31 December 20X1, the end of the reporting period
Present obligation as a result of a past obligating event – There is still no obligation for the costs of fitting smoke filters because no obligating event has occurred (the fitting of the filters). However, an obligation might arise to pay fines or penalties under the legislation because the obligating event has occurred (the non-compliant operation of the factory).
An outflow of resources embodying economic benefits in settlement – Assessment of probability