Scenario 1: Oz Home Loans Ltd is an Australian company that provides mortgage loans. Oz Home Loans

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Question:

Scenario 1: Oz Home Loans Ltd is an Australian company that provides mortgage loans. Oz Home Loans Ltd’s mortgage loan portfolio currently comprises 150 mortgage loans of which 40 are to first home buyers and the remainder to property investors.

Management of Oz Home Loans Ltd wants to significantly increase the number of mortgage loans. A detailed review of their operations conducted by external consultants revealed that the main obstacle to staff making new mortgage loans was the time and effort required to administer the existing loans

To overcome this obstacle, management of Oz Home Loans Ltd decided to sell the mortgage servicing rights to the existing 150 mortgage loans to another financial services company, MDX Financial Services Ltd. The terms of the contract specify that MDX Financial Services Ltd assumes responsibility for servicing the mortgage loans. These services include: billing, collecting and processing payments from borrowers and forwarding the cash collected to Oz Home Loans Ltd; paying any tax and insurance related to the mortgage payments; dealing with borrower enquiries; undertaking modifications to the mortgage loans; and taking action to recover payments in arrears. In return for these services, MDX Financial Services Ltd receives a monthly servicing fee equal to 0.5% of the outstanding balance of each mortgage loan. Management of MDX Financial Services Ltd believes that this fee is greater than the amount of adequate compensation which is calculated as the cost of servicing the mortgage loans plus a reasonable amount of profit. The terms of the contract prohibit MDX Financial Services Ltd from selling the mortgage service rights.

Scenario 2: Capricornia Mining Ltd is an Australian mining company. In 2019 it acquired the Eastern Sands mine site where geologists had confirmed the existence of economically recoverable reserves of thorium (a radioactive element) that is extracted from the mineral monazite which, in Australia, is mined from heavy mineral sands. Interest in thorium has increased recently due to the development of a new generation of nuclear reactors that use thorium rather than uranium. Thorium is attractive because it results in less radioactive waste and it can reduce the hazard of nuclear accidents.

Concerned about the environmental impacts of mining heavy mineral sands which usually involves strip- mining, the Federal government passed legislation during the year ending 30 June 2020 that requires all mining companies that mine heavy mineral sands to fill in all strip mines deeper than 10 metres before 30 June 2030. The legislation imposes significant fines for non-compliance.

As at 30 June 2020, Capricornia Mining Ltd has not started mining operations at the Eastern Sands site. As at 30 June 2021, mining operations had commenced, and the strip mining had reached a depth of 5 metres. It is highly likely that the depth of the strip mine will exceed 10 metres in the future. On 30 June 2022, the strip mine had reached a depth of 15 metres.

Required

(a) For Scenario 1, explain how MDX Financial Services Ltd should account for the mortgage servicing rights (as an expense, an asset or a liability). Justify your answer by reference to the relevant conceptual framework definitions and recognition criteria.

(b) For Scenario 1, explain whether your answer to part (a) would be different if management of MDX Financial Services Ltd believed that the fee they received from Oz Home Loans Ltd was less than the amount of adequate compensation.

(c) For Scenario 2, explain whether Capricornia Mining Ltd should recognise a liability on 30 June 2020, on 30 June 2021, and on 30 June 2022. Justify your answer by reference to the relevant conceptual framework definitions and recognition criteria.