Energy Inc. Case

In: Business and Management

Submitted By matisse50
Words 1528
Pages 7
Scenario 1
Energy Inc. has a present obligation (IAS 37-17) and probable liability (ASC 450-20-25-2) on December 31, 2011 as a result of a past event, the contamination of the land, because it is 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 by it that it will clean up contamination (IAS 37-17/ASC 450-20). It is probable that an outflow of resources embodying economic benefits to settle that obligation will occur (IAS 37-23).…...

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