Name:

ASSIGNMENT 3

IAS 37 & IAS 10

1. On 1 October 2013, Xplorer commenced drilling for oil from an undersea oilfield. The extraction of oil
causes damage to the seabed which has a restorative cost (ignore discounting) of $10,000 per million
barrels of oil extracted. Xplorer extracted 250 million barrels of oil in the year ended 30 September 2014.
Xplorer is also required to dismantle the drilling equipment at the end of its five-year licence. This has an
estimated cost of $30 million on 30 September 2018. Xplorer’s cost of capital is 8% per annum and $1 has
a present value of 68 cents in five years’ time.

What is the total provision (extraction plus dismantling) which Xplorer would report in its
statement of financial position as at 30 September 2014 in respect of its oil operations?
A $34,900,000
B $24,532,000
C $22,900,000
D $4,132,000
(Dec 14)

2. Tynan’s year end is 30 September 2014 and the following potential liabilities have been identified:
(i) The signing of a non-cancellable contract in September 2014 to supply goods in the following year on
which, due to a pricing error, a loss will be made
(ii) The cost of a reorganisation which was approved by the board in August 2014 but has not yet been
implemented, communicated to interested parties or announced publicly
(iii) The balance on the warranty provision which relates to products for which there are no outstanding
claims and whose warranties had expired by 30 September 2014

Which of the above should Tynan recognise as liabilities as at 30 September 2014?

(Dec 14)

3. Each of the following events occurred after the reporting date of 31 March 2015, but before the financial
statements were authorised for issue.
Classify the following events as per IAS 10 Events After the Reporting Period.
A A public announcement in April 2015 of a formal plan to discontinue an operation which had been
approved by the board in February 2015
B The settlement of an insurance claim for a loss sustained in December 2014
C Evidence that $20,000 of goods which were listed as part of the inventory in the statement of financial
position as at 31 March 2015 had been stolen
D A sale of goods in April 2015 which had been held in inventory at 31 March 2015. The sale was made at
a price below its carrying amount at 31 March 2015
(June 15)

4. In a review of its provisions for the year ended 31 March 2015, Cumla’s assistant accountant has
suggested the following accounting treatments:
(i) Making a provision for a constructive obligation of $400,000; this being the sales value of goods
expected to be returned by retail customers after the year end under the company’s advertised 30-day
returns policy
(ii) Based on past experience, a $200,000 provision for unforeseen liabilities arising after the year end
(iii) The partial reversal (as a credit to the statement of profit or loss) of the accumulated depreciation
provision on an item of plant because the estimate of its remaining useful life has been increased by three
years

Which of the above suggested treatments of provisions is/are permitted by IFRS?

 (June 15)

5. The following two issues relate to Spiko Co’s mining activities:

Issue 1: Spiko Co began operating a new mine in January 20X3 under a five-year government licence
which required Spiko Co to landscape the area after mining ceased at an estimated cost of $100,000.

Issue 2: During 20X4, Spiko Co’s mining activities caused environmental pollution on an adjoining piece of
government land. There is no legislation which requires Spiko Co to rectify this damage, however, Spiko
Co does have a published environmental policy which includes assurances that it will do so. The estimated
cost of the rectification is $1,000,000.

Suggest the appropriate treatment in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets for the year ended 31 December 20X4?
(Sep 16)

6. Hopewell sells a line of goods under a six-month warranty. Any defect arising during that period is
repaired free of charge. Hopewell has calculated that if all the goods sold in the last six months of the year
required repairs the cost would be $2 million. If all of these goods had more serious faults and had to be
replaced the cost would be $6 million.
The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and 5% will have
to be replaced.

What is the amount of the provision required?