Disclosure of liability

AS 811 views 4 replies

Pooja Jajoo

29 Points Joined August 2011

Nice Nuke Corporation, which owns and operates a nuclear plant, recently received notice from the provincial government that it has to find a new disposal site for its radioactive waste. The company was also told that it is responsible for its radioactive waste. The company was also told that it is responsible for the environmental cleanup of the old site. The vice-president of engineering and the vice-president of finance meet the discuss the situation. The engineer says that it could take many years to clean up the site and that the cost could be considerable-a minimum of $50 million and perhaps as much as $100 million.
The vice-president of finance says that there is no way that the company can afford to record this liability. He says he is not even sure that he wants to disclose the potential liability, because of how this could affect the company's share price.

Questions:
a) who are the stakeholders in this situation?
b)what are the alternative reporting options that the company can use?
c)what is the likely impact of each alternative on the company's financial position?
d) is there anything unethical in what the vice-president of finance suggests doing about this potential liability?
e) what do you recommend the company do?

Please do reply...

Replies (4)

CA Sachin Rastogi

Audit/IFRS Manager

338 Points Joined September 2009

1. Both NICE nuke corporation and government are the stake holders in the above example. Nice nuke is interested in profits and Government is interested in taxes and as a regulator for enviorment safety objective.

2. The company needs to account this cost as a decomissioning liability and cannot disclose this liability as of contingent nature.

Accounting needs to be done in the following manner:

In case if there is a stautory requirement to perform such act then such costs are in the nature of decomissioning costs. They need to be immediately recognised based on best estimates available for the amount to be incurred at a future date. Obviously present value of the same need to be recognised as a liability with a debit in the relevant nuclear reactor fixed asset account. The estimates needs to be revisited at each reporting date and revision to the liability will be made. Further, each year an unwinding of cost need to be booked in the income statement with a credit to this decomissioning liability so that at the end of the term (let say 10 years) there will be enough liability in the books to retire this obligation.

The company should record this liability and i believe that there are no other options to this except to sell the rights in the nuclear plant.

Thanks

Pooja Jajoo

29 Points Joined August 2011

Thanks alot for replying....

Prabeer

B. COM (H) CA & CS Final

5484 Points Joined December 2007

CA Sachin Rastogi sir, if we debit the relevant nuclear reactor fixed asset account then only the value in the F Asset account will increase. How is this solution relevant with the decomissioning liability? Please elaborate.

and

Ms. Pooja Jajoo please provide the source of your query.

CA Sachin Rastogi

Audit/IFRS Manager

338 Points Joined September 2009

Prabeer when u initially record the decommissioning liability u need to debit the fixed asset and credit a non current decomissioning liability. The debit and credit is based on the present value of the liability which will be incurred after say 10 years.

Subsequent to above entry, each year u will depreciate the fixed asset over the residual useful live of the asset in a normal manner. Besides this u will book an unwinding of discount expense under finance cost in income statement with a credit in decomissioning liability so that at the end of 10 th year u will have enough amount to retire your enviornmental obligation.

Hope u will understand the flow of entries.