Question

Petroncan , CO operates in the oil industry, contaminating land at foreign location. The foreign country does not have environmenT law that will require Petrocan co. to clean up the contamination. However, Petrocan has a widely published policy to clean up all contamination that is causes, and it has a record of honoring this policy. Requirement: The company applies the three criteria of IAS 37 to determine whether recognition of a provision is appropriate.

1….. Is the criterion 2, " present obligation as a result of a past obligating event, " met ? how? Or how not? 2. Is the criterion

2, " an outflow of resources embodying economic benefits in settlement is probable." how? Or how not?

3. Determine whether Petrocon Co. should recognize a provision, if it can make a reliable estimate of the costs of clean-up. Yes___ or no____ . if yes, describe the recognition for what amount and in which financial schedules. If not, what accounting treatment should Petro Can do?

Answer 1

1) Criterion 2 is met and the company has a policy (obligation) to clean up all contamination and it has a record of honoring the policy.

2) The outflow of resources will be estimated and is probable even though foreign laws does not provide certainty on claiming the clean up but the policy and its upheld honor in some way secures the probability and certainty of cleaning up the environment.

3) In order for the provision to be recognized it must be measured reliable and it is probable therefore its recognition makes statements to be relevant and fairly present useful information.

The estimate will of-course be future estimate therefore the provision is discounted and made present value using time value of money and is recognized as a present value also capitalised to the Asset causing the need for clean up :

Journal entry Dr relevant asset by Present value of Clean up cost Credit Provision for for contamination by present value

then the difference between the present value and future value of the provision is taken as interest over the useful years of the relevant asset and is capitalized to the provision for clean up cost.

Journal entry

Dr Finance cost Credit Provision for clean up

The Provision is a liability goes into balance sheet non current liability

finance costs goes to income statement

Step-by-step explanation: