- 5 Marks
Question
Akakpo Ltd obtained a license free of charge from the government to dig and operate a gold mine. Akakpo Ltd spent GH¢6 million digging and preparing the mine for operation and erecting buildings on site. The mine commenced operations on 1 September 2014. The license requires that at the end of the mine’s useful life of 20 years, the site must be reclaimed, all buildings and equipment must be removed, and the site landscaped. At 31 August 2015, Akakpo Ltd estimated that the cost in 19 years’ time of the removal and landscaping would be GH¢5 million, and its present value is GH¢3 million.
On 31 October 2015, there was a massive earthquake in the area, and Akakpo Ltd’s mine shaft was badly damaged. It is estimated that the mine will be closed for at least six months and will cost GH¢1 million to repair.
Required:
i) Demonstrate how Akakpo Ltd should record the cost of the site reclamation as at 31 August 2015 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(3 marks)
ii) Explain how Akakpo Ltd should treat the effects of the earthquake in its financial statements for the year ended 31 August 2015 in accordance with IAS 10 Events after the Reporting Period.
(2 marks)
Answer
i) IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that future costs of reinstatement be provided for as soon as they become an unavoidable commitment. The mine’s license requires the work to be done, so there is a commitment as soon as the mine starts operations. The present value of the full cost must be provided for. GH¢3 million will be credited to provisions and added to the cost of the non-current asset.
(3 marks)
ii) The earthquake occurred after the end of the accounting period. Assets and liabilities at 31 August 2014 were not affected. The earthquake is indicative of conditions that arose after the reporting period and does not give any further evidence in relation to assets and liabilities in existence at the reporting date. Therefore, according to IAS 10 Events after the Reporting Period, it will be classified as a non-adjusting event after the reporting period. The cost of the repairs will be charged to the Statement of Comprehensive Income in the period when it is incurred. Due to the impact on Akakpo Ltd (closure and loss of earnings for six months), the earthquake and an estimate of its effect will need to be disclosed by way of a note in Akakpo Ltd’s financial statements for the year ended 31 August 2015.
- Topic: Financial Reporting Standards and Their Applications
- Series: MAY 2017
- Uploader: Theophilus