Question

Petroncan , CO operates in the oil industry, contaminating land at foreign location. The foreign country does not have environmenT law that will require Petrocan co. to clean up the contamination. However, Petrocan has a widely published policy to clean up all contamination that is causes, and it has a record of honoring this policy. Requirement: The company applies the three criteria of IAS 37 to determine whether recognition of a provision is appropriate.

1….. Is the criterion 2, “ present obligation as a result of a past obligating event, “ met ? how? Or how not? 2. Is the criterion

2, “ an outflow of resources embodying economic benefits in settlement is probable.” how? Or how not?

3. Determine whether Petrocon Co. should recognize a provision, if it can make a reliable estimate of the costs of clean-up. Yes___ or no____ . if yes, describe the recognition for what amount and in which financial schedules. If not, what accounting treatment should Petro Can do?

Answer 1

1. Yes, the criterion 2 " present obligation as a result of past obligating event" is met - As the company would be required to clean up the contamination done by them while extracting the oil in the foreign country. It has raised a present obligation i.e. to clean up the land whereas the past event was "oil extraction done by them".

2. Yes, outflow will be possible by paying money and spending resources for the cleaning up. Therefore, there will be an outflow of resources embodying economic benefits.

3. Yes, the Petrocon co should recognize the provision if it can a make reliable estimate of the cost of cleanup. The amount of provision should be the cost of total spending to be made on the cleanup and the same shall be covered under Current Liability of the balance sheet. Also, should be reported in the Income Statement on the expense side.

4. In case they are not able to recognize the exact amount, in such case they should present it as a contingent liability and show it in the notes to the financial statements.