Saltworks Inc. (SI) produces salt. Its main assets are two pieces of property that have two salt mines in them (mine 1 and mine 2). Both mines are currently in production. The salt exists in a crystalline layer of rock that rests about 50 metres below ground level. In order to mine the salt, tunnels are created by drilling through the rock. When the salt layer is reached, several holes are drilled into the salt layer to the bottom of the layer. Spring water is then fed through the holes. The water dissolves the salt and a cave is gradually created over time that is filled with salty water. The salt water is siphoned out of the hole, concentrated, and dried. It is then ground up and packaged. The life of a salt mine is about 30 years. Mine 1 is almost fully mined, so there is very little salt left. Mine 2 is a new mine and the tunnels are currently being dug. So far, $500,000 of costs have been incurred this year to drill and build tunnels for mine 2.
Mine 1 is completely depreciated and has a zero carrying value (net book value). Recently, SI discovered a new vein of salt in the mountain where mine 1 previously existed. The company's engineers feel that this new mine (mine 3) will produce at least as much salt as mine 1. Costs of $300,000 have been incurred to date to locate and test the salt. The salt from mine 3 is of a different quality and SI is not sure that a market currently exists for this salt nor that the costs of min ing will be recoverable from future revenues. Nonetheless, the company plans to continue developing the mine in the meantime to confirm this.
The mountain that houses mine 2 is covered with pine trees. An unrelated company (Logging Co. or LC) has approached SI for the rights to cut the trees down. SI has agreed to sell these rights for $400,000, which has been paid upfront. The contract gives LC the right to cut down a certain number of trees over the next three years. In order to gain access to the trees, logging roads must be built. LC has approached SI about sharing the costs (equally) of building the roads. SI has agreed as it feels it can use the roads later to transport salt. Already, costs of $1 million have been incurred to build the roads. Unfortunately, the work done to date on the roads has to be redone due to excessive rainfall, which led to a huge flood. The flood washed out parts of the new road.
During the year (before the flood), SI had purchased a weather derivative contract. SI paid a premium of $100,000 for the contract. Under the terms of the contract, the counterparty will pay to SI $500,000 if more than 250 mm of rain falls within a certain period (causing flooding). Since this has happened, SI has approached the counterparty for payout.
A local environmental group has discovered that LC will be cutting down trees and is currently in discussions with SI.
The group's members are demanding that SI replant the mountain with small seedlings that will grow into trees and eventually replace the trees that will be cut down. Although no contracts have been signed and SI has not specifically agreed to any course of action, SI has assured the group that it is company policy to be environmentally conscientious.
SI's president recently had a meeting with the CEO of a public company that is looking to purchase SI in the next year. The CEO is anxious to have a look at SI's financial statements and has asked that they be prepared in accordance with IFRS.
Instructions
Assume the role of the accountant for SI and discuss the financial reporting issues relating to the above. SI is a private company. (Hint: Use the conceptual framework to analyze any issues that are more complex.)