Answer to Question #58613 in Accounting for wie sufri

Question

In 2015, Giant Store made the decision to close a loss-making department in 2016. The company proposed to make a provision for the future costs of termination in the 2015 profit or loss. Its argument was that a liability existed in 2015 which should be recognised in 2015. The auditor objected to recognising a liability, but agreed to recognition if it could be shown that the management decision was irrevocable.

Discuss whether a liability exists and should be recognised in the 2015 statement of financial position.

Answer 1

If in 2015, Giant Store made the decision to close a loss-making department in 2016 and proposed to make a provision for the future costs of termination in the 2015 profit or loss, then we can't say, that liability existed in 2015, before the income statement is provided, so it shouldn't be recognized in 2015 statement of financial position. And the argument of auditor, who objected to recognizing a liability, but agreed to recognition if it could be shown that the management decision was irrevocable, is correct.
That's why the liability shouldn't be shown in the 2015 statement of financial position.