...the accounting treatment for new income tax? What is the accounting treatment for training employees? 4. Does Energy have obligations to install smoke filters this year? What is the accounting treatment for installing smoke filters in Energy’s factories next year? SUMMARY CONCLUSION ON ACCOUNTING QUESTIONS 1. Energy should recognize and accrue the liability of clean up lands in this year. Energy should charge clean up costs to expenses. 2. Energy has no obligations to undertake the soil remediation in Dirty country. 3. Energy should recognize the retraining costs to compensation expenses. 4. Energy should recognize install smoke filters to expense. AUTHORITATIVE AND INTERPRETIVE GUIDANCE CONSIDERED Refer to ASC 410-20-25-1 (Background for...
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...recognize an ARO of the two warehouses in states that have special handling and disposal of the asbestos laws? 2. Should LOI recognize an ARO of the ten warehouses containing asbestos that reside in state with special asbestos handling and removal laws, which are planned to be sold within five years but not demolished or otherwise significantly renovate prior to their disposal? 3. Should LOI recognize an ARO of the two warehouses containing asbestos reside in states that do not have special handling and disposal of the asbestos laws, but with a legally binding contract to sell the warehouses in six months to a third party? SUMMARY CONCLUSION ON ACCOUNTING QUESTIONS 1. LOI should recognize ARO when the two warehouses conform to ASC 410-20-15 scopes. 2. LOI should recognize ARO for the 10 warehouses in states which have special asbestos handling and removal laws, because there is an unambiguous requirement and an estimate date of retirement. Also, the fair value can be reasonably estimated. 3. LOI should recognize ARO of the two warehouses containing asbestos reside in states that do not have special handling and disposal of the asbestos laws. For the reason that there is a legally binding with the third party, which allows the buyer to require LOI to remove...
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...ISSUE: Accounting recognition of LOI’s liabilities related to obligations to handle and dispose of asbestos upon retirement of its warehouses. BRIEF BACKGROUND OF LOI LOI Company owns 50 warehouses in the United States and 25 of the warehouses contain asbestos. 23 of the 25 warehouses reside in states that require special handling and disposal of asbestos when the building is significantly renovated or demolished. LOI plans to sell 10 of the 23 warehouses within 5 years and doesn’t plan to demolish or significantly renovate the building before the disposal; For the other 13 warehouses, LOI has no plan to make significant renovation or demolish the warehouse in the foreseeable future, and there isn’t enough information to measure its asset retirement obligation. Besides the 23 warehouses, LOI has legally binding contract to sell the other 2 warehouses in 6 months, there is a 90% probability that the third party buyer will not enforce LOI to handle or dispose asbestos. KEY CONSIDERATIONS INVOLVED IN THE ACCOUNTING QUESTIONS 1. For the 10 warehouses that LOI plan to sell within 5 years, should the uncertain asset retirement obligation be recognized as liabilities? 2. For the 13 warehouses that LOI has no foreseeable plan to renovate or demolish, is the asset retirement obligation measurable, and therefore, need to be recognized as liabilities? 3. For the 2 warehouses contain asbestos reside in states that do not have law requiring special handling and disposal...
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...w/ asbestos | No state requirements re: removal of asbestos when significantly renovated or demolished | * Under contract to sell * Buyer has option to require LOI to remove asbestos * LOI believes only 10% chance Buyer will require removal | 10 w/ asbestos | State laws requiring removal of asbestos when significantly renovated or demolished | To be sold w/in 5 years | 13 w/ asbestos | State laws requiring removal of asbestos when significantly renovated or demolished | Plan to operate indeterminately | Issue Should LOI recognize an asset retirement obligation for each of the categories of warehouses with asbestos? Analysis FASB Accounting Standards Codification (ASC) Subtopic 410-20 Asset Retirement Obligations presents the relevant guidance on asset retirement obligations. Per ASC 410-20-15-2, asset retirement obligations include: “a. Legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition… and (or) the normal operation of a long-lived asset... c. A conditional obligation to perform a retirement activity. Uncertainty about the timing of settlement of the asset retirement obligation does not remove that obligation from the scope of this Subtopic but will affect the...
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...constructed, developed or through normal operation provided the company can make a reasonable estimate of the “ fair value” of the liability. There are five levels of hierarchy for calculating fair value. An entity must begin at the highest level and may work its way down if sufficient information is unavailable. The highest and preferred FVM is quote prices from active markets with the lowest being assumptions developed by the entity 410-20-25-4 An entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made. If a tangible long-lived asset with an existing asset retirement obligation is acquired, a liability for that obligation shall be recognized at the asset’s acquisition date as if that obligation were incurred on that date. 410-20-25-6 An entity shall identify all its asset retirement obligations. An entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation if any of the following conditions exist: It is evident that the fair value of the obligation is embodied in the acquisition price of the asset. b. An active market exists for the transfer of the obligation. c. Sufficient information exists to apply an expected...
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...Weather Or Not ARO Should Be Recognized In All Three Situations. Asset Retirement Obligations This memo is intend to present appropriate treatment of the ARO estimation problem experienced by the Lack of Information (LOI) based on the findings from interviews with all 50 of the warehouse managers and on-site visits at each of the 50 locations of its warehouses countrywide. The onsite observations search for any evidence of damages in both the on-site property like the roof, walls, floors and general conditions. The interview with the managers obtains information about the characteristics of the warehouses that are not readily observable. The information obtained is very important in the preparation of the fiscal year reports and the determination of the disposal price. Accounting The auditor makes sure that all the assets accounted on the balance sheet are real, the management in addition, has the authority over any asset they claim the organization owns, and that there are no claims against the assets in the balance sheet that aren’t recorded. The on-site visits and the manager interviews therefore provided sufficient proficient evidential matter that afforded the reasonable basis for the opinion regarding the fiscal year statement being audited (The Codification of Statements on Auditing Standards, AICPA, and AU Section 326) Categories of findings According to the interviews and onsite visits findings 23 warehouses reside in states with special asbestos handling...
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...and disposal laws. 3. The thirteen warehouses for which the settlement date is indeterminate. Literature Statement 143 Paragraph 35 of FASB Concepts Statement NO. 6, Elements of Financial Statements, Characteristics of a liability 1. It embodies a duty or responsibility 2. There is little or no discretion to avoid a future transfer or use of assets to satisfy the obligation, and 3. The obligating event has already occurred. In June 2001 the FASB issued a Statement No. 143, Accounting for Asset Retirement Obligations requiring entities to record liabilities for tangible, long-lived assets that must be retired or disposed of in a specified way by law or contract. Such liabilities are known as Asset Retirement Obligations (AROs) ASC 410-20-25-13 If a current law, regulation, or contract requires an entity to perform an asset retirement activity when an asset is dismantled or demolished, there is an unambiguous requirement to perform the retirement activity even if that activity can be indefinitely deferred. At some time deferral will no longer be possible, because no tangible asset will last forever (except land). Therefore, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, Paragraph 3, a “conditional asset retirement obligation”(CARO) is defined as: “A legal obligation to perform an...
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...the lessor concerning the maintenance obligation by setting up a reserve, the guidance in ASC 840-10-05-9A through 840-10-05-9C states that the maintenance reserve shall be recognized as a deposit asset and reimbursed later when the required repair and maintenance is completed by the lessee. However, the provision in the lease agreement does not call upon the lessee to make deposits but simply requires the lessee to perform repair and maintenance on the leased premises. Alternative 1: Accrual Method Since there is a contractual liability for the lessee to perform general repair and maintenance, the maintenance requirement provision may be assumed as a present economic obligation, not just a future commitment. If the fair value estimate of future maintenance expense can be measured with sufficient reliability, the provision may lead to recognition of an accrued liability for the repair and maintenance performance obligation at the inception of the lease. The accrued liability for the repair and maintenance can be reversed when payment is made or liability is created through the performance of the required repair and maintenance. Alternative 2: Direct expense method Another way to treat this provision would be not to recognize at the inception of the lease but directly expense the costs when the required maintenance is performed. Regarding the accrual method in Alternative 1, ASC...
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...Brief Summary Needspace entered a operating lease with WeHaveIt for 10-Year Lease term.Lease agreements have certain provisions depending on how the contract is written by the lessor to the lessee and what type of lease agreement. In this lease agreement we are focusing operating lease with provisions of NeedSpace and WeHaveIt, which has a 10 year lease term, no options to renew or negotiate renewal offered in the contract and the lessee incurs certain cost, repairs and maintenance. In regards to ASC 840 leases, according to 840-10-20 and 840-10-05-9A, 840-10-05-9B an operating lease is when the lessor the owner of the property gives the lessee the right to use property, plant or equipment for a limited amount of time. Meaning the lessee is responsible by a legal contract to make repairs and maintain leased property. To make sure the lessee adhere to the contract the lessee has to make financial deposits to the lessor called supplemental rent or maintenance reserves. Furthermore, the lessor is required to repay the lessee when all repairs and maintenance is completed to the extent of the amount of the deposits. In some instances, when the cumulative maintenance costs is less than the cumulative deposits over the period of the lease contract. Upon expiration of the lease the lessor maybe entitled to keep the excess deposits depending on the lease agreement. How should NeedsSpace account for the two obligations noted as provisions in the lease agreement? Analysis and Solution ...
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... could lead to legal action against PC if not followed by a prescribed date. The Company needs to determine if the contaminated soil and smoke filter requirement should be disclosed on the financial statements as an asset retirement obligation, loss contingency, or an environmental obligation. APPLICABLE AUTHORITATIVE LITERATURE FASB Accounting Standards Codification (ASC) 410 Asset Retirement and Environmental Obligations FASB Accounting Standards Codification (ASC) 450 Contingencies DISCUSSION OF ALTERNATIVES The following section will address the alternative treatments accounting for both the remedial action and smoke filtration system under US GAAP. Recording both issues as a loss contingency will be discussed first, followed by soil contamination as environmental remediation, then applying the asset retirement obligation treatment for pollution from normal operations. Alternative 1: Contaminated Soil and Smoke Filter Disclose both environmental issues as a loss contingency using a footnote. Soil contamination and smoke filters both meet the definition of contingent loss. ASC 450-20-20 states: “An existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur…” Cleanup costs, extent of the pollution,...
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...Pharma Co Date: June 18, 2016 Prepared by: John B. Owens Viewed by: Joseph Walsh Issue: Determine proper accounting treatment for restructuring program costs under GAAP for the year ended December 31, 201X. Background: Pharma is in the process of restructuring a business line. As part of a restructuring, the Pharma is considering the relocation of a manufacturing operation from its present location to a new facility in a different geographic area. The relocation plan would include terminating certain employees (research and development employees). On December 15, 201X, Pharma issued a press release announcing its intentions to terminate the lease of the old facility. On December 27, 201X, Pharma management communicated the main features of a one-time, non-voluntary termination plan to its employees. Pharma will incur a relocation cost of $500,000 and staff training cost of $1.5 million. Further, the Company has entered into irrevocable contracts with certain other relevant parties to affect the restructuring plan over the following 18 months. The cost to dismantle the existing manufacturing operation is estimated to be $1 million. In the jurisdiction in which Pharma operates its current facility, there is no legal obligation for dismantling plants when abandoned. Pharma has not historically dismantled its plants when abandoned but decided to make an exception. In a press release, the Company has stated its intention to dismantle the existing operation. The...
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...25 warehouses reside in states with special asbestos handling and removal laws. If the buildings are demolished or significantly renovated, LOI is responsible for the removal of the asbestos. For 10 of the 25 warehouses that reside in states with special asbestos handling and removal laws, LOI plans to sell the buildings without ever meeting the criteria to have to remove the asbestos and thus no obligation exists. ASC 240-20-55-58 and ASC 240-20-55-60 state that although timing of the performance of the asset retirement activity is conditional on the factory undergoing major renovations or being demolished, existing regulations create a duty or responsibility for the entity to remove and dispose of asbestos in a special manner, and the obligating event occurs when the regulation is put in place (55-58) or when the entity acquires the factory (55-60). LOI’s plans to sell the building in the next five years signifies an active market for the transfer obligation and meets the criteria for recognizing the fair value of the retirement obligation according to ASC 240-20-25-6. For the other 13 buildings, LOI has no plans in the foreseeable future to make significant renovations or demolish the buildings. Since there is not sufficient information to measure its asset retirement obligation due to an indeterminate settlement date LOI does not recognize the obligation. I agree that LOI cannot recognize the fair value of their...
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...questions listed in the Case 12-3 (Provisions and Contingencies) This assignment is suggested to be a typed double-spaced document between 1 to 4 pages. ------------------------------------------------- Information about FASB Accounting Standards Codification: Analyze the case and provide citations by using the FASB Accounting Standards Codification system. * To access the FASB Accounting Standards Codification (CRS): Website: http://aaahq.org/ascLogin.cfm Username: AAA51393 Password: 2ChgCxk * The citation format (e.g., ASC 230-10-20) is listed by “topic”, “subtopic”, and “section” respectively under the FASB Accounting Standards Codification system. * When providing quotes, you do not need to copy and paste the entire paragraph. Only the citations and brief summary are needed. You need to specify the topic, subtopic, section, and paragraph if applicable. * An example is provided below: According to ASC 230-10-20, the statement of cash flows classifies all transactions affecting cash into one of the following categories: operating, inventing and financing activities * Please note that the Codification only contains SEC content related to matters within the basic financial statements, but it does not contain the entire population of SEC rules, regulations, interpretive release, and staff guidance. Also, the international financial standards are not included in the codification system. Thus, you might also need to search the following: ...
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...Chapter 6 Property and Equipment and Other Assets Overview 6.01 Health care entities use various kinds of property and equipment. Those assets are generally significant to the financial position of institutional health care entities, such as hospitals and nursing homes. Typical accounts used to record property and equipment transactions are land, land improvements, buildings and improvements, leasehold improvements, equipment (fixed and movable), leased property and equipment, accumulated depreciation and amortization, and construction in progress. Health care entities also have intangible assets, which may be acquired in connection with business combinations or purchases, or developed from other resources of the entity. Intangibles with finite lives are amortized according to their useful life. Examples of intangibles include: Health Plans customer relationships, such as employer groups or members provider networks trademarks trade names software licenses favorable leases non-compete agreements goodwill Hospitals and other health care facilities licenses certificates of need managed care contracts goodwill Physician practices medical charts non-compete agreements managed care contracts goodwill 6.02 6.03 Supplies inventories are generally not very significant to the financial position of health care entities. However, because of the volume and cost of supplies used, they may be much more significant to operating expenses and the statement of operations. Supplies typically...
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...C10-13 May 30, 2014 President, Tenth National Bank From: Student Subject: Removal of Asbestos and purchase of office building This is in regards to the removal of asbestos from the buildings owned by Tenth National Bank and the cost for the eradication of the project. The buildings are property, and are considered important components of a company’s assets. I researched assets in accordance to FASB Statements of Financial Accounting Concept No. 6, par. 25 states that assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Also, Concept No. 6, par. 26 states does the asset have the essential characteristic that it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows. Tenth National Bank knowingly knew prior to the purchase of the office building that it contained asbestos. Perhaps, the estimated $2 million is a cost to prepare the office building for its headquarters for the use in the normal course of business. However, as Concept No. 6, par. 6 states: will the asset embody a probable future benefit that with contribute to the future cash flows. Under these assumptions, I recommend the $2 million should be capitalized to the cost of the office headquarters. Tenth National Bank did not know prior to purchase of the shopping mall that it contained asbestos. There are a few...
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