Question

FuelSource Co (FuelSource) is a U.S. company with a December 31st year-end that prepares its financial statements in accordance with U.S. GAAP. FuelSource is planning to issue its financial statements on March 20, 2018. It is now March 18, 2018 and FuelSource management is evaluating new information regarding future contingencies and subsequent events to determine their impact (if any) on the December 31, 2017 financial statements. Environmental Clean-Up FuelSource operates in the oil industry, and its operations sometimes result in soil contamination. One of FuelSource’s subsidiaries is located outside of the U.S. in Dirty Country where there is no environmental legislation. However, FuelSource has a widely published environmental policy in which it undertakes to clean up all contamination that it causes, regardless of whether it occurs in a jurisdiction with no environmental regulations. FuelSource has a record of honoring this published policy. In November 2017, FuelSource contaminated land while operating in Dirty Country and anticipates that cleanup efforts will begin in May of 2018 and are estimated to cost approximately $1 million. Acquisition of an Oil Refinery Company Using the funds from a line of credit, FuelSource’s management drew $10 million on March 10, 2018, to acquire an oil refinery in the northeast United States. On the basis of its initial assessment from the Company’s due diligence (that started shortly before the balance sheet date), management’s best estimate of the allocation of the $10 million purchase price is as follows: $2 million of current assets and $8 million noncurrent assets (comprising $5 million of identifiable noncurrent assets, $2 million of intangible assets, and $1 million of goodwill). The estimated purchase price allocation has not been finalized, but is expected to be after the financial statements are issued. Required: Answer the following questions. Be sure to fully discuss the accounting options available to FuelSource for the above events and provide your recommendations for the best accounting treatments. Your responses should be supported by the FASB Codification and any other resources you find helpful (e.g., Conceptual Framework, real-world examples, etc.). 1. How do you think FuelSource should account for the environmental cleanup costs it anticipates incurring during 2018? Should Fuelsource record or disclosing anything about these costs in its December 31, 2017 financial statements? Explain why or why not.

Answer 1

Answer to 1

The anticipated cleanup cost which is estimated to be about $1 million. Based on the current financial situation of the company it is quite tough for the business to afford the cleanup cost. In order to manage the cleanup cost of the business it is important for FuelSource to take loan of $1 million. It is also significant to report on the books of accounts of the company where the liability side of the business will increase. This must appear in the financial statement of the company for the financial year 2018 as per the FASB Codification condition.

The cleanup cost will not appear in the financial statement of December 31, 2017 but will appear in the financial statement of the year 2018. The reason behind that is the anticipated cleanup cost will appear in the 2018 and will definitely be arised in the books of account of the financial year 2018. This automatically creates an impact in the balance sheet of the financial statement for the financial year 2018.