Star Trek Nuclear Fuels, a public limited company, disclosed the following information in its financial statements for the year ending 30 November 2019: The company purchased an oil company during the year. As part of the purchase agreement, oil has to be supplied to the company’s former holding company at an uneconomic rate for a period of five years. As a result, a provision for future operating losses has been set up of £155m, which relates solely to the uneconomic supply of oil. Star Trek is also facing a legal claim for £300 million from a competitor who claims they have breached a patent in one of their processes. Star Trek has obtained legal advice that the claim has little chance of success and the insurance advisers have indicated that to insure against losing the case would cost £15 million as a premium. Required: Discuss whether the provision has been accounted for correctly under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Star Trek Nuclear Fuels, a public limited company, disclosed the following information in its financial statements for the year ending 30 November 2019: The company purchased an oil company during the year. As part of the purchase agreement, oil has to be supplied to the company’s former holding company at an uneconomic rate for a period of five years. As a result, a provision for future operating losses has been set up of £155m, which relates solely to the uneconomic supply of oil. Star Trek is also facing a legal claim for £300 million from a competitor who claims they have breached a patent in one of their processes. Star Trek has obtained legal advice that the claim has little chance of success and the insurance advisers have indicated that to insure against losing the case would cost £15 million as a premium. Required: Discuss whether the provision has been accounted for correctly under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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- Star Trek Nuclear Fuels, a public limited company, disclosed the following information in its financial statements for the year ending 30 November 2019:
The company purchased an oil company during the year. As part of the purchase agreement, oil has to be supplied to the company’s former holding company at an uneconomic rate for a period of five years. As a result, a provision for future operating losses has been set up of £155m, which relates solely to the uneconomic supply of oil. Star Trek is also facing a legal claim for £300 million from a competitor who claims they have breached a patent in one of their processes. Star Trek has obtained legal advice that the claim has little chance of success and the insurance advisers have indicated that to insure against losing the case would cost £15 million as a premium.
Required:
Discuss whether the provision has been accounted for correctly under IAS 37 Provisions,
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