In: Accounting
Fuel Source, Inc. is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with (1) IFRS in reporting to its parent and (2) U.S. GAAP for reporting to its U.S. based lender. Fuel Source operates in the oil industry and its operations sometimes result in soil contamination. Fuel Source cleans up this contamination when required to do so under the laws of the particular country in which it operates. During 2018, Fuel Source operates in Dirty Country where there is no legal requirements for Fuel Source to clean up any contamination. However, Fuel Source has a widely published policy in which it undertakes to clean up all contamination that it causes. Fuel Source has a record of honoring this published policy every time it has caused contamination. The U.K. parent also has a widely published environmental policy in which it undertakes to clean up all contamination it causes and also has a strong record of honoring this published policy. During the year ending December 31, 2018 Fuel Source’s operations created environmental damage which is estimated to cost $1,000,000 and $1,250,000 to remediate. Fuel Source plans to publish its 2018 financial statements on February 15, 2019.
Accounting Issue: Should Fuel Source recognize the costs to clean the contaminated soil in Dirty Country under U.S. GAAP and IFRS for the year ending December 31, 2018?
GAAP Codification
Reference: _______________________
Guidance: (cut and paste the guidance)
Your answer/interpretation if Fuel Source should recognize costs to clean the contaminated soil under U.S. GAAP?
IFRS Reference: (make sure you list the standard/paragraph) _______________________
Guidance: (cut and paste the guidance)
Your answer/interpretation if Fuel Source should recognize costs to clean the contaminated soil under IFRS?
According to IFRS 37 Paragraph 10,
A Provision is a liability of uncertain amount or timing. Liability is a present obligation as a result of past event, the settlement of which results in outflow of resources.
Obligation is a duty or Responsibility. It Arises due to Legal Obligations(required as per law) or Constructive Obligation (Created due to past Practices or Specific Statement by the Entity, which has a valid expectation for others that entity will discharge the obligations).
The Obligating event is contamination of soil, which gives rise to constructive obligation as the entity has created a valid expectation through its policy, And to do this,requires probable outflow of resources. Therefore a provision is recognised for the best estimate of the costs of the clean up as per IFRS.
As per U.S. GAAP 450-20,
A Provision should be created only when there is an Legal Obligation.. Since in this case,there is no Legal Obligation,it Should not be Recognised.