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Question 1: Greenie

(a) Greenie, a public limited company, builds, develops and operates airports. During the
financial year to 30 November 20X0, a section of an airport collapsed and as a result
several people were hurt. The accident resulted in the closure of the terminal and legal
action against Greenie. When the financial statements for the year ended 30 November
20X0 were being prepared, the investigation into the accident and the reconstruction of
the section of the airport damaged were still in progress and no legal action had yet been
brought in connection with the accident. The expert report that was to be presented to the
civil courts in order to determine the cause of the accident and to assess the respective
responsibilities of the various parties involved, was expected in 20X1.
Financial damages arising related to the additional costs and operating losses relating to
the unavailability of the building. The nature and extent of the damages, and the details of
any compensation payments had yet to be established. The directors of Greenie felt that
at present, there was no requirement to record the impact of the accident in the financial
statements. Compensation agreements had been arranged with the victims, and these
claims were all covered by Greenie's insurance policy. In each case, compensation paid by
the insurance company was subject to a waiver of any judicial proceedings against
Greenie and its insurers. If any compensation is eventually payable to third parties, this is
expected to be covered by the insurance policies. The directors of Greenie felt that the
conditions for recognising a provision or disclosing a contingent liability had not been met.
Therefore, Greenie did not recognise a provision in respect of the accident nor did it
disclose any related contingent liability or a note setting out the nature of the accident
and potential claims in its financial statements for the year ended 30 November 20X0.
(6 marks)
Question 2: Ryder
Ryder, a public limited company, is reviewing certain events which have occurred since its
year end of 31 October 20X5. The financial statements were authorised on 12 December
20X5. The following events are relevant to the financial statements for the year ended 31
October 20X5:
(a) Ryder disposed of a wholly owned subsidiary, Krup, a public limited company, on 10
December 20X5 and made a loss of $9 million on the transaction in the group financial
statements. As at 31 October 20X5, Ryder had no intention of selling the subsidiary which
was material to the group. The directors of Ryder have stated that there were no
significant events which have occurred since 31 October 20X5 which could have resulted
in a reduction in the value of Krup. The carrying value of the net assets and purchased
goodwill of Krup at 31 October 20X5 were $20 million and $12 million respectively. Krup
had made a loss of $2 million in the period 1 November 20X5 to 10 December 20X5.
(6 marks)
Question 3: Royan
(a) The existing standard dealing with provisions, IAS 37 Provisions, contingent liabilities
and contingent assets, has been in place for many years and is sufficiently well
understood and consistently applied in most areas. The IASB feels it is time for a

If risk and probability are taken into account. the Board has issued an Exposure Draft Measurement of liabilities in IAS 37 – Proposed amendments to IAS 37. Electron has recently constructed an ecologically efficient power station.fundamental change in the underlying principles for the recognition and measurement of non-financial liabilities. Royan intends to carry out the dismantling work itself and estimates the cost of the work to be $150 million in ten years' time. which is ten years. and there is a risk that the costs may increase by $5 million. The company has grown significantly over the last few years and is currently preparing its financial statements for the year ended 30 June 20X6. a public limited company. Electron has estimated at 30 June 20X6 that it will cost $15 million (net present value) to restore the site to its original condition using a discount rate of five per cent. William decided to relocate a division from one country to another. Required (i) Discuss the existing guidance in IAS 37 as regards the recognition and measurement of provisions and why the IASB feels the need to replace this guidance. operates in the energy sector. Ninety-five percent of these costs relate to the removal of the power station and five per cent relates to the damage caused through generating energy. where labour and raw material costs are cheaper. A condition of being granted the operating licence by the government is that the power station be dismantled at the end of its life which is estimated to be 20 years. The power station cost $100 million and began production on 1 July 20X5. To this end. (7 marks) Question 5: William William is a public limited company and would like advice in relation to the following transactions. Required Describe the accounting treatment of the above events under IAS 37. extracts oil and has a present obligation to dismantle an oil platform at the end of the platform's life. Depreciation is charged on the power station using the straight line method. The present value of this cost is $129 million. a public limited company. Shortly before the year end of 31 May 20X3. (9 marks) (b) Royan. then there is a probability of 40% that the present value will be $129 million and 60% probability that it would be $140 million. The present value of the work is $105 million. The relocation is due to take place in . Royan cannot cancel this obligation or transfer it. (7 marks) Question 4: Electron Electron. a) William operates a defined benefit pension plan for its employees. The entity feels that if no risk or probability adjustment were needed then the cost of the external contractor would be $180 million in ten years' time. A market exists for the dismantling of an oil platform and Royan could hire a third party contractor to carry out the work.

Plan B involves the reorganisation of the headquarters in 18 months time. Lockfine proposes recognising a provision in respect of Plan A but not Plan B. William requires advice on how to account for the relocation costs and the reduction in the net pension liability for the year ended 31 May 20X3. On 13 May 20X3. and includes the redundancy of 20% of the headquarters' workforce. William wishes to know how to account for this potential liability in Chrissy's entity financial statements and whether the treatment would be the same in the consolidated financial statements. Lockfine will carry out further analysis before deciding which of its fleets and related employees will be affected. The company has made announcements before the year end but there was a three month consultation period which ended just after the year end.December 20X3. At the time of the acquisition. Chrissy was being sued as there is an alleged mis-selling case potentially implicating the entity. In previous announcements to the public. and will accrue no further benefits under William's defined benefit pension plan. a detailed formal plan was approved by the board of directors. Additionally. whereby Lockfine was negotiating with employee representatives. The claimants are suing for damages of $10 million. Lockfine's reporting date is 30 April 20X9. Lockfine has suggested that it may restructure the off-shore fleet in the future. William estimates that the fair value of any contingent liability is $4 million and feels that it is more likely than not that no outflow of funds will occur. a public limited company. (5 marks) Question 7: Blackcutt Blackcutt is a local government organisation whose financial statements are prepared using International Financial Reporting Standards. Chrissy. (7 marks) b) William acquired another entity. Required Discuss the principles and practices to be used by Lockfine in accounting for the above valuation and recognition issues. the plan is to make 40% of its seamen redundant. (4 marks) Question 6: Lockfine Lockfine. Total relocation costs (excluding the impact on the pension plan) are estimated at $50 million. The Lockfine board has agreed two restructuring projects during the year to 30 April 20X9: Plan A involves selling 50% of its off-shore fleet in one year's time. The resulting reduction in the net pension liability due the relocation is estimated to have a present value of $15 million as at 31 May 20X3. Thus individual employees had not been notified by the year end. The affected employees were informed of this decision on 14 May 20X3. on 1 May 20X3. operates in the fishing industry and has recently made the transition to International Financial Reporting Standards (IFRS). Half of the affected division's employees will be made redundant in July 20X3. (a) Blackcutt wishes to create a credible investment property portfolio with a view to determining if any property may be considered surplus to the functional objectives and .

The estimated useful life of the school was 25 years. (4 marks) (c) On 1 December 20X0. Blackcutt owns several plots of land. and there is no expectation that numbers using the school will increase in the future and thus the building will not be reopened for use as a school. Other plots of land have no current purpose as Blackcutt has not determined whether it will use the land to provide services such as those provided by national parks or for short-term sale in the ordinary course of operations. Blackcutt opened a school at a cost of $5 million. (6 marks) Required Discuss how the above events should be accounted for in the financial statements of Blackcutt. Because of the nature of the non-current asset. At 30 November 20X6. The change in use would have no effect on the estimated life of the building. As a result. Chemco has leased the warehouse from Blackcutt and is using it as a storage facility for chemicals.1 million. Blackcutt has had a report that the chemicals have contaminated the land surrounding the warehouse. value-in-use and net selling price are unrealistic estimates of the value of the school. The housing department regularly sells part of its housing inventory in the ordinary course of its operations as a result of changing demographics. Blackcutt has no recourse against Chemco or its insurance company for the clean-up costs of the pollution. is to provide housing to low-income employees at below market rental. (7 marks) (b) Blackcutt owns a warehouse. The local government organisation supplements its income by buying and selling property. the school was closed because numbers using the school declined unexpectedly due to a population shift caused by the closure of a major employer in the area. Blackcutt has introduced a hazardous chemical policy and has begun to apply the policy to its properties. The school is to be converted for use as a library. On 30 November 20X6. The national government has announced its intention to enact environmental legislation requiring property owners to accept liability for environmental pollution. The rent paid by employees covers the cost of maintenance of the property. it is virtually certain that draft legislation requiring a clean up of land already contaminated will be enacted shortly after the year end. The current replacement cost for a library of equivalent size to the school is $2.requirements of the local government organisation. Some of the land is owned by Blackcutt for capital appreciation and this may be sold at any time in the future. The following portfolio of property is owned by Blackcutt. which is not held for sale. Part of the inventory. .