Mindmap
Case Study
Inhalt der Mindmap
Case Study
On 1 April 2013 the company brought into use a new processing plant that had cost £15 million to construct and had an estimated life of ten years. The plant uses hazardous chemicals what are put into containers and shipped abroad for safe disposal after processing. The chemicals have also contaminated the plant itself and this occurred as soon as the plant was used. It is a legal requirement that the plant is decontaminated at the end of its life. The estimated present value of the cost of this decontamination, using a discount rate of 8% per annum, is £5 million. The financial statements have been charged with £1.5 million (£15 million/ 10 years) for plant depreciation and a provision of £500,000 (£5 million/ 10 years) had been made towards the cost of the decontamination.
- i) IAS37 Provisions, Contingent Liabilities and Contingent Assets requires that the costs of decontamination should be provided for in full, since the contamination has already occurred. It is correct to discount the amount of the provision to its present value. Therefore the amount of the provision should be £5 million, not £500,000.
- IAS16 PPE states that the initial cost of an item of PPE includes any estimated costs of dismantling and restoration, as long as the obligation to meet those costs is incurred when the item is acquired (as in this case). So the £5 million decontamination costs should be added to the cost of the Plant, bringing this cost to a total of £20 million.
- The statement of comprehensive income for the year to 31 March 2014 will be charged with depreciation of £2 million (£20 million/10 year). The SOFP will show a NCA of £18 million and a NCL of £5 million.
- ii) IAS10 - Events after the Reporting Period requires that the fraud of £210,000 should be treated as an adjusting event and that the financial statements for the year to 31 March 2014 should be adjusted accordingly. £210,000 should be deducted from cost of sales and shown as an expense in the statement of comprehensive income. This may require separate disclosure if the amount is considered to be material.
- The remaining £30,000 of the fraud should be treated as a non-adjusting event and should be disclosed in the notes (if material).
- iii) The possible insurance claim is a contingent asset. Since it is only possible (not probable) that the claim will be successful, it should be ignored when prepring the SOFP for the year to 31 March 2014.
- The remaining £30,000 of the fraud should be treated as a non-adjusting event and should be disclosed in the notes (if material).
- ii) IAS10 - Events after the Reporting Period requires that the fraud of £210,000 should be treated as an adjusting event and that the financial statements for the year to 31 March 2014 should be adjusted accordingly. £210,000 should be deducted from cost of sales and shown as an expense in the statement of comprehensive income. This may require separate disclosure if the amount is considered to be material.
- The statement of comprehensive income for the year to 31 March 2014 will be charged with depreciation of £2 million (£20 million/10 year). The SOFP will show a NCA of £18 million and a NCL of £5 million.
- IAS16 PPE states that the initial cost of an item of PPE includes any estimated costs of dismantling and restoration, as long as the obligation to meet those costs is incurred when the item is acquired (as in this case). So the £5 million decontamination costs should be added to the cost of the Plant, bringing this cost to a total of £20 million.
- i) IAS37 Provisions, Contingent Liabilities and Contingent Assets requires that the costs of decontamination should be provided for in full, since the contamination has already occurred. It is correct to discount the amount of the provision to its present value. Therefore the amount of the provision should be £5 million, not £500,000.
The company is currently suing one of its suppliers for failure to supply goods according to contract. Legal advice suggests that Lawston plc will probably win the case and will probably be awarded damages.
- A contingent asset should be disclosed
The company operates an open-cast mine and is legally obliged to restore the environment when mine workings are complete. This is expected to occur in the year 2024. The estimated cost of rectifying the environmental damage caused so far is £3 million. The estimated total cost of rectifying the damage caused until mine workings are complete is £25 million.
- A provision is required equal to the present value of £3 million
At the end of an accounting period, a company has each of the following:
- A present obligation which will probably require an outflow of resources
- A present obligation which will probably not require an outflow of resources
- A possible obligation arising from a disputed past event; the company denies that this event occurred and a legal case is currently proceeding; it seems likely that the company will win the case and that an outflow of resources will not be required.
- A possible obligation arising from another disputed past event; the company again denies that this event occurred and again a legal case is currently proceeding; it seems likely that the company will lose this case and that an outflow of resources will be required.
- Recognise a provision
- Disclose a contingent liability
- A possible obligation arising from another disputed past event; the company again denies that this event occurred and again a legal case is currently proceeding; it seems likely that the company will lose this case and that an outflow of resources will be required.
- Disclose a contingent liability
- A possible obligation arising from a disputed past event; the company denies that this event occurred and a legal case is currently proceeding; it seems likely that the company will win the case and that an outflow of resources will not be required.
- Recognise a provision
- A present obligation which will probably not require an outflow of resources
- A present obligation which will probably require an outflow of resources
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- Mindmap am Case Study, erstellt von ahmednoor765 am 16/04/2015.
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