Question 4

Lennox plc is a national company in the manufacturing industry. You are the assistant accountant and have been asked to review the following information:

1) On 2 December 2017 the board of Lennox plc decided to close down a division making a particular product. On 15 December 2017 a detailed closure plan was agreed by the board and, on the same day, letters were sent to both customers and employees informing them of the intended closure.

2) Lennox plc gives warranties at the time of sale to purchasers of its products. Under the terms of warranty the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale.

3) Lennox plc operates profitably from a factory that it has leased under an operating lease. During December 2017 they relocate its operations to a new factory. The lease on the old factory has four years remaining and it cannot be cancelled. Lennox plc hopes to re-let the premises to a tenant however no tenant has been found by year end.

Required:

With reference to IAS 37, Provisions, Contingent Assets and Contingent Liabilities:

a) State the criteria that must exist before a provision can be recognised in the financial statements. 

b) Advise whether or not a provision should be recognised in the financial statements of Lennox plc as at 31 December 2017 for each of the three scenarios. You must provide reasons for your answer.