...Scenario # 1 The oil company has contaminated soil and has a history of cleaning up contaminations if required by law. It is virtually certain there will be a law requiring such cleanup shortly after year-end. Environmental Loss Contingencies 410-30-05-25 Although environmental remediation liabilities is not one of the examples discussed in paragraph 450-20-05-10, environmental remediation liabilities are loss contingencies, and the discussion in paragraphs 450-20-55-10 through 55-17 can be useful in understanding the requirements of Subtopic 450-20 as they relate to environmental remediation liabilities. SFAS No. 5 Accounting for Contingencies INTRODUCTION 1. For the purpose of this Statement, a contingency is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (hereinafter a "gain contingency") or loss (hereinafter a "loss contingency ") to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability orthe loss or impairment of an asset or the incurrence of a liability. Litigation, Claims, and Assessments 450-20-55-10 The following factors should be considered in determining whether accrual and/or disclosure is required with respect to pending or threatened litigation and actual or possible claims and assessments: • a. The period in which the underlying...
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...respondents criticized the original dislosure requirements of loss contingencies: “a.The initial disclosure of specific information about a loss contingency often does not occur until a material accrual is recognized for that loss contingency, sometimes taking investors by surprise. b. The at least reasonably possible threshold for disclosing loss contingencies has not resulted in the disclosure of the full population of an entity’s existing loss contingencies that would be of interest to financial statement users. c. The amounts recognized in the financial statements related to loss contingencies are not transparent to users. In order to improve the disclosures about certain loss contingencies, such change of standards is necessary.” In response to this concern, the Board made two roundable discussions and got some feedback from respondents and finally issued an exposure draft stating that “An entity shall disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand all of the following: a. The nature of the loss contingencies. b.Their potential magnitude. c.Their potential timeing (if known).” It is reasonable the Board revised some proposal in insponse to the comment letters from respondents. For example, respondents argued that some unnecessry disclosure of certain remote loss contingencies would show fianancial statement users and mislead loss contingencies information. “ The Board agreed with this opinion that it is...
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...virtually certain that a draft law requiring cleaning up will be enacted. It is probable (more likely than not) that Energy Inc. will be required to transfer economic benefits in settlement which is an outflow of resources embodying economic benefits in settlement (IAS 37-23). The amount of the obligation or loss can also be estimated reliably since Energy Inc. has made similar payments for cleanup in other countries, which is the best estimate of the costs of the clean (IAS 37-36/ASC 450-20-25-2). As a result, according to IAS 37-14, Energy Inc. should recognize a provision in reporting to its U.K. parent under IFRSs and based on ASC 450-20-25-2, a provision needs to be recognized in reporting to its U.S.-based lender in accordance with U.S. GAAP as of December 31, 2011. However, in the case that Energy Inc. cannot reasonably estimate the cost of the cleanup, a provision should not be recognized but disclosed provision in reporting to its U.K. parent under IFRSs and U.S.-based lender in accordance with U.S. GAAP (ASC 450-20-50-5). Scenario 2 FuelSource Co. causes contamination and operates in Dirty Country where there is no environmental legislation. However, FuelSource Co. has a widely published environmental policy in which it undertakes to clean up all contamination that it causes and a record of honoring this published policy. Thus, it gives rise to a constructive obligation because the conduct of FuelSource Co. has created a valid expectation on the part of those affected...
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...Case 9-4 How should NeedsSpace account for the two obligations noted as provisions in the lease agreement? ● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.” By entering the lease agreement, NeedsSpace (the lessee) becomes legally and contractually responsible for performing general repair and maintenance on the leased premises. Assuming that the lessee is required to make deposits to financially protect 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...
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...Current Liabilities and Contingencies Current Liabilities IAS 1, Presentation of Financial Statements, requires liabilities to be classified as current or noncurrent. Current liabilities are those liabilities that a company: a. expects to settle in its normal operating cycle, b. holds primarily for the purpose of trading, c. expects to settle within twelve months of the balance sheet date, or d. does not have the right to defer until twelve months after the balance sheet date. The classification and accounting for current liabilities under IFRS is very similar to U.S. GAAP. Differences relate to the following: * Refinanced short-term debt – may be reclassified as long-term debt only if refinancing is completed prior to the balance sheet date (under U.S. GAAP, a refinancing agreement must be reached but the refinancing need not be completed by the balance sheet date) * Amounts payable on demand due to violation of debt covenants – must be classified as current unless a 12-month waiver is obtained from the lender by the balance sheet date (waiver must be obtained by the annual report issuance date under U.S. GAAP) * Bank overdrafts – are netted against cash if the overdrafts form an integral part of the entity’s cash management (classified as current liabilities under U.S. GAAP). * Deferred income taxes – deferred income tax assets and deferred income tax liabilities are not allowed to be classified as current (under U.S. GAAP, deferred...
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...loss provisions under the different fact patterns. BRIEF BACKGROUND Energy Inc. (Energy), a Public Company, operates in the oil industry. Energy’s operations sometimes result in soil contamination. Energy cleans up this contamination when required to do so under the laws of the particular country in which it operates. Energy Inc. has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. Energy, Inc. has a record of honoring this published policy. Energy is currently evaluating certain fact patterns to determine the appropriate accounting treatment required under U.S. GAAP. ISSUES 1. Is Energy required to record a loss provision for a legislation-required cleanup enactment, for old and new contamination, that takes effect soon after the year end, December 31, 2011? 2. Is Energy required to record a loss provision in a country in which it operates even though there is no environmental legislation in this country? 3. Is Energy required to record a loss provision to retrain a large proportion of its administrative and sales workforce in order to comply with changes in the income tax system brought about by the government? 4. Is Energy required to record a loss provision due to new legislation that requires the installment of smoke filters in its factories by June 30, 2012, thou no installation occurred at year end December 31, 2011? SUMMARY CONCLUSION ON ISSUES 1. Energy cannot record a loss provision for this...
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...Akhmad Yusuf ACCT 351 Research Case 1 1. As of December 31, 2011, what amount, if any, of sales due should be recognized in eVade’s financial statements? According to FASB ASC 450-20-25-2, in order to recognized a loss contingency, two of the following conditions have to be met; information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and the amount of loss can reasonably be estimated. Since eVade considers the risk of detection to not be probable, there is no need to make any provision as of December 31, 2011. However, a suitable disclosure has to be made in notes to financial statement about this loss contingency with an estimated amount of $60 million dollars (Sales tax payable $50 million, interest $6 million, and penalties $ 4million). 2. What effect, if any, does eVade’s decision to participate in the tax amnesty program have on the amount recognized as of March 31, 2012? As of March 15, 2012, eVade company has decided to participate in the tax amnesty program. Therefore conforming to FASB ASC 250-10-50-8 and ASC 250-10-50-9, eVade company should recognize the amount of liability of $25 million dollars in the financial statement on March 31, 2012. This loss however, will not have impact on the 2011 financial statement. 3. What amount should be recognized in the financial statements...
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...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 ● Provision 1: “Lessor may require the lessee to perform general...
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...net of discounts are recorded as current liabilities in the ‘sales in advance of carriage’ account until recognized as revenue. Yes, this would be handled similarly under U.S. GAAP. Amount 2013: 853 million euros 2012: 750 million euros Yes, transactions would be similar under U.S. GAAP. C2. Read the note for “provisions for liabilities and charges.” a. Do the beginning and ending balances of total liabilities and charges shown in the note for the fiscal year tie to the balance sheet? By how much has the total amount of the BA’s “provisions for liabilities and charges” increased or decreased during the fiscal year? Is the threshold for recognizing a liability associated with these items any different under IFRS than it is under U.S. GAAP? Explain. The balances do not match when you look at the note and balance sheet. It appears that the balance has increased. On the balance sheet there are three different types of provisions. Provisions for deferred tax for 721 and other provisions for 244. These are non-current liabilities. There are also short-term provisions for 292 under current liabilities. The total for all three of these provisions totals 1257. Also there is Employee benefit obligations for 238 under non-current liabilities. Under US GAAP these liabilities would be expense. However, under IFRS these are liabilities. b. Write journal entries for the...
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...MEMORANDUM Date: To: American Chemical Corporation From: Issue: How should ACC accrue and disclose the trial decision on their financial statement? Recommendation: American Chemical Corporation should accrue and disclose the loss contingency on its Condensed Financial Statements from the lower court’s trial decision in the lawsuit from the Environmental Protection Agency. Sources: Discussion: This memo will discuss the accounting standards and adjustments for accruing and disclosing the loss contingency for American Chemical Corporation (ACC). Mr. Molina and the management team chose not to accrue and disclose the loss in the lower court’s trial decision; this violates the FASB accounting standards. A lower trial court had imposed a $70 million fine payable to the Environmental Protection Agency (EPA) for a series of pollution law violations. The company immediately appealed to the U.S. District court and had set aside the fine to a lower cost. ACC’s external legal counsel assumed that the Court will hear the case in approximately three years, and it probably will assert the trial court’s decision to impose a fine. With the legal counsel’s analysis of similar cases, the estimated ranges of potential monetary outcomes were from $30 million to $70 million. ACC has put forth $5 million in legal fees as a reasonable estimate of the cost to appeal. With the appeal, the ACC, EPA, and the World Bank entered into an assumption agreement. ACC assigned a security...
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...Case 12-03 Provisions and Contingencies The appropriate accounting standards to recognize and measure are IAS 37 under IFRS and FAS 450-20 under GAAP. Some examples of provisions are given in IAS 37. Standards | IFRS IAS 37 | U.S. GAAP 450-20 | RecognitionIFRS 14 – 35GAAP 450-20-25 | Recognize a Provision when: a) a present obligation exists b) probable outflow of resources (probable = more likely than not) c) a reliable estimate can be madeIf all conditions are not met, no provision shall be recognized | Recognize a Loss Contingency when:a) information is available before financial statements are issued or are available to be issued that indicates a liability is probable (probable = future event(s) are likely to occur)b) loss can be reasonably estimated | Scenario 1 IAS 37: A provision is recognized as contamination occurs for any legal obligations of clean up, or for constructive obligations if the company's published policy is to clean up even if there is no legal requirement to do so (past event is the contamination and public expectation created by the company's policy) [Appendix C, Examples 2B] Therefore, Energy Inc. should recognize a provision as of December 31, 2011, in reporting to its U.K. parent under IFRSs, while it should not recognize a provision in reporting to its U.S.-based lender in accordance with U.S. GAAP. Scenario 2 IAS 37.10: A provision is recognized as contamination occurs for constructive obligations if the company's published...
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...Case Study: Contingency: BP a. A contingent liability is a potential liability that depends on a future event occurring or not occurring; or past events that are not recognized because the outcome is not probable or the amount of obligation cannot be measured. Examples: Law suits and government agencies investigations and product warranties. A contingent liability and the related contingent loss are recorded with a journal entry only if the contingency is both probable and the amount can be estimated. If a contingent liability is only possible (not probable), or if the amount cannot be estimated, a journal entry is not required. When a contingent liability is remote (such as a nuisance suit), neither a journal nor a disclosure is required. b. A warranty is a contract between a company and its customers. From BP stand point, the warranty gives BP an additional protection from buying the telescopic joint. From GE oi & Gas, the warranty gives GE the responsibility to repair or replace the product if it is damaged or faulty. c. G Firms must make several judgments to account for contingencies. For example, with respect to the warranty on the telescopic joint, GE Oil and Gas must estimate how many joints will require servicing (failure rate), of those, how many will actually be serviced (i.e., how many customers will remember that the product is under warranty and make a claim to GE Oil and Gas to get it fixed), and the projected cost per repair. For GE...
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...ACCT 2015 INTERMEDIATE FNANCIAL ACCOUNTING 11 Current Liabilities, Contingencies & Provisions Required Reading: Alfredson – Chap 5, Keiso – Chaps 13, IAS 37 Learning Objectives 1. CURRENT LIABILITIES: – Define and explain types of current liabilities. – Account for the major types 2. IAS 37 PROVISIONS & CONTINGENCIES – Define Provisions and answer the following questions: • • • Why do them When to provide How much to provide – Calculate and account for Restructuring Provisions – Define Contingent Assets & Liabilities and apply relevant measurement and recognition rules – Apply IAS 37 Disclosure Requirements CURRENT LIABILITIES LIABILITY – Claims against the business arising out of a past transaction that will cause an outflow of resources e.g. loans, notes payable • Long-Term Liability - Obligations that a company does not reasonably expect to liquidate within the normal operating cycle Current Liability - Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. • 1 CURRENT LIABILITIES E13-2 (Accounts and Notes Payable) The following are selected 2007 transactions of Sean Astin Corporation. Sept. 1 - Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system. Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in payment of account. Oct. 1 - Borrowed $50,000 from the Shore Bank by signing...
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...FASB Accounting Standards Codification Written Project (120 points) Due date: May 6 (No late submission is accepted) ------------------------------------------------- Instructions: Answer all three 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...
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...Contingency planning: Contingency planning helps to identify alternative course of action to take when things go wrong. Developing a contingency plan involves making decisions in advance about the management of human and financial resources, coordination and communications procedures, and being aware of a range of technical and logistical responses. Such planning is a management tool, involving all sectors, which can help ensure timely and effective provision of humanitarian aid to those most in need when a disaster occurs. Time spent in contingency planning equals time saved when a disaster occurs. Effective contingency planning should lead to timely and effective disaster-relief operations. The contingency planning process that PRAN follows can basically be broken down into three simple questions: • What is going to happen? • What are we going to do about it? • What can we do ahead of time to get prepared? When forecast are available and premises are established, a number of alternative course of actions have to be considered. For this purpose, each and every alternative will be evaluated by weighing its pros and cons in the light of resources available and requirements of the organization. The merits, demerits as well as the consequences of each alternative must be examined before the choice is being made. After objective and scientific evaluation, the best alternative is chosen. Managers of PRAN always surf the market to avoid vacuum in Market in...
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