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Obligations must exist independently of an entity’s future actions

Under legislation passed in 2012, an entity is required to fix smoke filters in its factories by 30 June 2014. The entity has not fitted the smoke filters.

At 31 December 2013, the end of the reporting period, no event has taken place to create an obligation. Only once the smoke filters are fitted or the legislation takes effect, will there be a present obligation as a result of a past event, either for the cost of fitting smoke filters or for fines under the legislation.

At 31 December 2014, there is still no obligating event to justify provision for the cost of fitting the smoke filters required under the legislation because the filters have not been fitted. However, an obligation may exist as at the reporting date to pay fines or penalties under the legislation because the entity is operating its factory in a non-compliant way. However, a provision would only be recognised for the best estimate of any fines and penalties if, as at 31 December 2014, it is determined to be more likely than not that such fines and penalties will be imposed. [IAS 37 Appendix C, Example 6].

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